Deluxe Corporation

Transfer Pricing Master File

For the Year Ended December 31, 2018

1.1   Purpose

1.2   Report Contents

1.3   Summary of Results

1.4   Limitations

2.1   Organizational Structure

2.2   Business Segments and Product Overview

2.3   Entities Relevant to the Company’s Intercompany Transactions

3.1   Commercial Printing Services

3.2   Buyer Power

3.3   Supplier Power

3.4   New Entrants

3.5   Substitutes

3.6   Rivalry

3.7   Key Success Factors

3.8   Conclusion

4.1   Functions

4.2   Assets

4.3   Risks

5.1   North America Management and Back Office Services

5.2   North America Manufacturing

5.3   North America Marketing Services

5.4   North America Sales – Wholesale / Direct Marketing

5.5   North America Sales – Retail – Direct to Business

5.6   North America IT Services

Glossary of Terms and Abbreviations

1. Introduction

Deluxe Corporation ("Deluxe" or the "Company") engaged Transportal to develop transfer pricing documentation for the year ended December 31, 2018. This report (“Master File”) contains standardized information relevant to all Deluxe corporate group members. The Master File complements the Company’s local files (“Local Files”) that define and describe certain specific material transactions of the local Company entities. Together, the Master File and Local Files constitute Deluxe’s 2018 Transfer Pricing Documentation (“Documentation”).

1.1 Purpose

The purpose of the Documentation is to establish whether the transfer pricing applied in certain controlled transactions engaged in by entities within the Deluxe Group is arm’s length. Our analysis accords with the U.S. Internal Revenue Code (“IRC”) § 482, Treas. Reg. § 1.482-1 et seq. and Treas. Reg. § 1.6662-6 (“U.S. Regulations”) and the Organization for Economic Co-operation and Development Transfer Pricing Guidelines (“OECD Guidelines”). Our analysis is also consistent with the Canadian income tax laws and administrative procedures on transfer pricing under Section 247 of the Income Tax Act and the Canada Revenue Agency’s (“CRA”) Information Circular 87-2R on transfer pricing dated September 27, 1999 (“Canadian Legislation”).

The table below lists the U.S. entities (“U.S. Affiliates”) relevant to the Documentation:

The table below lists the foreign entities (“Foreign Affiliates”) relevant to the Documentation:

Together, the U.S. Affiliates and Foreign Affiliates are hereafter referred to as “Deluxe Affiliates” or “Affiliates.”

The Company’s intercompany transactions covered in its documentation are the:

1. Provision of management services from DLX to the Deluxe Affiliates;

2. Provision of management services from DEO to the Deluxe Affiliates;

3. Sale of labels and related products from DCULLC to DEO;

4. Sale of paper products from DMO to DEO and SGINC;

5. Sale of paper products from DEO to DCUS (mail order - direct to consumer);

6. Sale of paper products from DCUS to CBD (mail order - direct to consumer);

7. Sale of paper products from DEO to DFS (wholesale and direct marketing sale within the U.S.);

8. Sale of paper products from DEO to DSBS (direct to business / services businesses within the U.S.), and

9. Provision of IT services by HOST CAN to DSBS.

According to the U.S. Regulations, the OECD Guidelines and the Canadian Legislation, transactions between controlled parties must be priced on an “arm’s length” basis, or as if the related enterprises were dealing with each other as independent or unrelated parties. Under the U.S. Regulations, a controlled transaction meets the arm's length standard “…if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm's length result).”

Under the OECD Guidelines, the authoritative statement of the arm’s length principle is provided in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries.

Article 9 provides:

[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

1.2 Report Contents

In accordance with the Master File contents recommended by Action 13 of the Base Erosion and Profit Shifting Initiative, this Master File report contains the following information:

 Section 2 reviews the Company’s business and products, including its legal structure, important drivers of profit;

 Section 3 provides an industry analysis;

 Section 4 provides a functional analysis;

 Section 5 presents our search for and analysis of comparable data relevant to the Company’s intercompany transactions; and

 Section 6 contains relevant appendices.

1.3 Summary of Results

TRANSPORTAL conducted benchmarking searches to benchmark the Company’s intercompany transactions. These benchmarking studies are detailed in this Master File. The following paragraphs summarize these benchmarking studies. The Local Files utilize this data to apply the selected transfer pricing methods.

1. North American Management and Back Office Services

TRANSPORTAL identified 15 comparable management and back office service providers. We calculated the return on total costs (“ROTC”) for the most recent three years of available data for these companies and applied a weighted average. We then calculated the interquartile range (“IQR”) of the ROTCs. Benchmark management and back office service providers generated a three-year weighted average ROTC IQR extending from 4.4 to 9.2 percent, with a 6.4 percent median.

2. North American Contract Manufacturing

TRANSPORTAL identified seven comparable manufacturing companies. We calculated the ROTCs for the most recent three years of available data for these companies and applied a weighted average. We then calculated the IQR of the ROTCs. Benchmark manufacturing companies generated a three-year weighted average ROTC IQR extending from 3.8 to 14.0 percent, with a 6.4 percent median.

3. North American Marketing Services

TRANSPORTAL identified six comparable marketing service providers. We calculated the ROTCs for the most recent three years of available data for these companies and applied a weighted average. We then calculated the IQR of the ROTCs to remove outliers. Benchmark marketing service providers generated a three-year weighted average ROTC IQR extending from -2.3 to 9.7 percent, with a 5.4 percent median.

4. North American Sale – Wholesale/Direct Marketing

TRANSPORTAL identified sixteen comparable wholesale/direct marketing companies. We calculated the operating margin (“OM”) for the most recent three years of available data for these companies and applied a weighted average. We then calculated the IQR of the OMs. Benchmark wholesale/direct marketing companies generated a three-year weighted average OM IQR extending from 1.5 to 6.2 percent, with a 2.4 percent median.

5. North American Sales – Retail/Direct to Business

TRANSPORTAL identified nine comparable retail/direct to business companies. We calculated the OM for the most recent three years of available data for these companies and applied a weighted average. We then calculated the IQR of the OMs. Benchmark retail/direct to business companies generated a three-year weighted average OM IQR extending from 1.4 to 3.9 percent, with a 3.1 percent median.

6. North American IT Services

TRANSPORTAL identified eight comparable IT service providers. We calculated the ROTC for the most recent three years of available data for these companies and applied a weighted average. We then calculated the IQR of the ROTCs to remove outliers. Benchmark IT service providers generated a three-year weighted average ROTC IQR extending from 4.3 to 15.0 percent, with a 6.3 percent median.

The table below provides a summary of the results of the benchmarking studies:

1.4 Limitations

In accordance with TRANSPORTAL’s agreement with Deluxe, this report is limited to issues concerning transfer pricing compliance with the Regulations for the Company’s intercompany transactions. The IRC and U.S. Regulations require that transfer prices within a controlled group be “consistent with the results that would have been realized if uncontrolled parties had engaged in the same transaction under the same circumstances (arm’s length result).”

This report does not address any additional tax issues that may exist or may arise outside this report's limited scope. Additional issues may exist that could affect the U.S. tax treatment of the Company’s intercompany transactions; this report does not consider or provide a conclusion with respect to any additional issues. This report is not intended for any other purpose, is not intended for any other person, and is not intended for any other entities. This report may not be utilized by Deluxe, by any person, or by any entity to promote, market, or recommend any tax related matter herein.

TRANSPORTAL provides this report solely with respect to the Company’s intercompany transactions. This report is intended to assist the Company in gathering certain information for transfer pricing documentation purposes in compliance with IRC § 6662(e) and implementing regulations Treas. Reg. § 1.6662-6. Please note that TRANSPORTAL does not warrant that the Company’s transfer pricing policies will withstand Internal Revenue Service (“IRS”) scrutiny. Should the IRS impose a transfer pricing related adjustment, we provide no guarantee that the Company will avoid an adjustment or related interest or penalty costs.

The Company has made representations and provided facts pertinent to this analysis to TRANSPORTAL. In this regard, the Company has affirmed the completeness and accuracy of such pertinent representations and facts. TRANSPORTAL has not independently verified the completeness and accuracy of such representations and facts, and TRANSPORTAL will not independently verify the completeness and accuracy of such representations and facts. Should the Company discover that any such representations and facts are not entirely complete or accurate, it is imperative that the Company inform TRANSPORTAL immediately in writing, as any such incompleteness or inaccuracy could cause changes to the conclusions presented herein.

TRANSPORTAL has not examined all the documents necessary to execute the Company’s intercompany transactions. TRANSPORTAL assumes that the Company has taken all necessary steps to execute the Company’s intercompany transactions as required by applicable federal, state, or local law. TRANSPORTAL believes that the conclusions in this report are consistent with the relevant provisions of IRC § 482 and the regulations thereunder, and the judicial and administrative interpretations thereof. However, there can be no guarantee that tax authorities will agree. The above authorities are subject to change, retroactively or prospectively, and any such change could affect the validity of the conclusions presented herein. Unless specifically engaged, TRANSPORTAL will not update the advice rendered in this report to reflect subsequent changes or modifications to the relevant laws and regulations or to reflect the judicial and administrative interpretations thereof.

2. Company Overview

Deluxe provides checks, forms, marketing solutions, accessories, and other products and services for small businesses and financial institutions. The Company’s principal executive office is in Shoreview, Minnesota. Aside from small sales offices, Deluxe occupies 70 facilities throughout the United States, seven facilities in Canada, two facilities in Europe and two facilities in Australia where Deluxe conducts printing and fulfillment, call center, data center and administrative functions. Approximately 15 percent of these facilities are owned and 85 percent are leased. These facilities have a combined floor space of approximately 3.0 million square feet.

2.1 Organizational Structure

Organizational charts reflecting the Company’s relevant entities and countries of domicile for 2018 are shown in Section A below.

2.1.1 U.S. Entities

2.1.2 International Entities

2.2 Business Segments and Product Overview

The Company operates through three business segments: Small Business Services, Financial Services and Direct Checks. All three segments offer products and services that help small businesses and financial institutions promote their businesses and acquire customers. The table below displays revenue and operating income by business segment for the years ended December 31, 2018, 2017 and 2016.

Deluxe is one of the largest suppliers of checks in the United States, both in terms of revenue and the number of checks produced. As shown in the table below, revenues for checks have steadily declined, while marketing solutions and other services revenues have steadily increased. In 2018, marketing solutions and other services revenues surpassed revenues for checks. Forms, accessories, and other products revenues have remained relatively flat.

2.2.1 Small Business Services

The Small Business Services segment is the Company’s largest segment in terms of revenue and operating profit. Small Business Services operates under various brands including Deluxe®, Safeguard®, PsPrint®, Hostopia®, VerticalResponse®, Digital Pacific®, Inkhead®, LogoMix®, ColoCrossing®, and MyCorporation®, among others. This segment sells products and services to small businesses in North America, Australia, and portions of South America and Europe. The Company positions itself as a business partner who can provide many of the key elements needed to operate and promote small businesses, so the owners can focus instead on other aspects of their operations.

2.2.1.1 Products

Small Business Services offers products designed to provide small business owners with the customized documents to efficiently manage their business. Revenue from the sale of printed business forms comprises the largest proportion of the Small Business Services segment product revenue. Printed business forms include items such as deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices, and personnel forms. This segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Accessories and other products include promotional products, postcards, brochures, retail packaging supplies, apparel, greeting cards and business cards, envelopes, office supplies, stamps, and labels.

2.2.1.2 Services

The Small Business Services segment’s service offerings include web design, hosting and other web services; search engine optimization; marketing services, including email, mobile, social media and other self-service marketing solutions; digital printing services; logo design; fraud protection and security; and payroll services.

2.2.1.3 Distribution Channels

Small Business Services products are distributed through multiple channels. Primary sales channels include direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and other partners; affiliate relationships; networks of distributors and independent dealers; a direct sales force that focuses on selling to and through major accounts; and an outbound telemarketing group. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located throughout the United States, Canada, and Australia.

The Company is making efforts to simplify processes, eliminate complexity and lower costs in all its business segments. Small Business Services outsources the production of some of its products, including certain business forms, promotional products and apparel. The Company relies on strategic supplier sourcing arrangements and has been able to reduce the number of production facilities it owns by developing expertise in logistics, productivity and inventory management.

2.2.2 Financial Services

The Financial Services segment is the Company’s second largest segment in terms of revenue and operating profit. The Company expects that the suite of products and services offered by the Financial Service segment will offset the impacts of a decline in check usage. The Company is accelerating the pace of new product and service introduction and has invested in extending the Deluxe brand to increase brand awareness and loyalty in the financial services market beyond check-related solutions.

2.2.2.1 Products

The Financial Services segment sells personal and business checks and check related products such as stored value gift cards. Deluxe serves approximately 4,600 financial institutions in the United States. Consumers and small businesses typically submit their check orders to their financial institutions, which then forward the orders to Deluxe. Deluxe processes the orders and ships check directly to the consumers or small businesses. Financial Services produces a wide range of check designs, including licensed or cause-related designs such as Checks Unlimited®, Designer Checks®, Checks.com®, Check Gallery®, The Styles Check Company®, and Artistic Checks, among others. The Financial Services segment also sells deposit tickets, check registers, checkbook covers and stamps.

2.2.2.2 Services

The suite of services offered by the Financial Services segment are designed to help financial institutions operate more effectively and better address the needs of their customers throughout the customer life cycle. Service offerings include marketing communications services, rewards and loyalty programs, fraud monitoring and protection services for financial institution customers, financial institution profitability and risk management services, and a suite of financial technology solutions that customizes reporting, integrates receivables, accelerates deposits and payments and eliminates paper. Service offerings include:

 Deluxe Marketing Solutions – direct marketing solutions that help financial institutions acquire new customers, deepen existing customer relationships and retain customers. These offerings leverage data and analytics to help clients execute marketing campaigns across multiple contact channels, including direct mail, email, online and other digital media;

 Deluxe Treasury Management– comprehensive treasury management solutions, including accounts receivable processing and remote deposit capture, available at the customer site and as software-as-a-service and business process outsourced deployment models;

 Deluxe Rewards® – a loyalty rewards program that offers multiple touch points that enable our clients to have ongoing engagement with their customers;

 Deluxe Strategic Sourcing – a comprehensive outsourced service that enables financial institutions to improve efficiency, financial controls, and pricing compared to self-managing multiple supplier relationships;

 Banker's Dashboard® – online financial management tools that provide financial institutions with comprehensive daily insights into their financial picture; and

 Provent ^® – a comprehensive suite of identity protection services largely complementary to the Company’s check offerings.

2.2.2.3 Distribution Channels

The Financial Services segment’s products and services are sold primarily through a direct sales force, which executes product and service supply contracts with U.S. financial institution clients including banks, credit unions and financial services companies. The Financial Services segment is expanding into sales of software- and cloud-based products and services designed to help financial institutions better address the needs of their customers throughout the customer lifecycle. Certain service offerings are sold to clients other than financial institutions.

Check supply contracts usually range in duration from three to six years. The segment provides enhanced services such as customized reporting, file management, expedited account conversion support, fraud protection services, new account support, trackable delivery and billing services. The Company also leverages the Deluxe Business Advantage program, which is designed to maximize financial institution business check programs. It offers many of the products and services of the Small Business Services segment to the small business customers of financial institutions through several service level options. The revenue from the products and services sold through this program is reflected in Small Business Services segment results.

2.2.3 Direct Checks

Direct Checks is the nation's leading direct-to-consumer check supplier, providing products and services to more than 4.7 million consumers in the past 24 months. These checks are sold under various brand names, including Checks Unlimited®, Designer Checks®, Checks.com®, Check Gallery®, The Styles Check Company®, and Artistic Checks®. The Company uses a variety of direct marketing techniques to acquire new customers, including newspaper inserts, in-package advertising, statement stuffers, co-op advertising and search engine marketing and search engine optimization strategies to direct traffic to Deluxe websites which include checksunlimited.com, designerchecks.com, checks.com, checkgallery.com, styleschecks.com, and artisticchecks.com.

Direct Checks competes primarily on price and design and believes that pricing in the direct-to-consumer channel is generally lower than retail prices charged to consumers in the financial institution channel. The Company competes on design by offering a selection of images with high consumer appeal, many of which are licensed from well-known artists and organizations.

Other products sold by the Direct Checks segment include deposit tickets, check registers, checkbook covers, and stamps.

2.2.3.1 Services

The Direct Checks segment provides fraud protection and security services, as well as package insert programs under which marketing materials are included in the Company’s check packages. The Company is focused on increasing sales to existing customers. Efforts include the check protection service offered in partnership with EZShield, Inc., which provides reimbursement to consumers for losses resulting from forged signatures or endorsements and altered checks.

2.2.3.2 Distribution Channels

Deluxe sells personal and business checks and related products and services directly to consumers using direct response marketing and the Internet. Deluxe estimates the direct-to consumer personal check-printing portion of the payments industry accounts for approximately 12 percent of all personal checks sold in the United States.

2.3 Entities Relevant to the Company’s Intercompany Transactions

The table below lists the Company’s entities relevant to the Company’s intercompany transactions:

2.3.1 Deluxe Corporation (DLX)

Deluxe Corporation is the parent company, providing administrative services to other members of the Deluxe group. DLX is responsible for executive management, corporate development, strategic marketing, supply management and vendor relations, information technology, accounting/finance, human resources/payroll, tax, treasury, legal and other management services.

2.3.2 Deluxe Enterprise Operations, LLC (DEO)

Deluxe Enterprise Operations, LLC is an administrative service provider to other members of the Deluxe group. DEO is responsible for general management, strategic marketing, supply management and vendor relations, information technology, accounting/finance, human resources/payroll, other management services, and intangible property (“IP”).

2.3.3 Deluxe Manufacturing Operations, LLC (DMO)

Deluxe Manufacturing Operations, LLC performs and coordinates manufacturing functions for Deluxe, including production scheduling and planning, design engineering, technical training, and other functions related to the manufacturing process. DMO sells its products to DEO and SGINC. DMO operates several facilities, including distribution centers, warehouses, and order fulfillment plants. Plants are located throughout the U.S., including California, Illinois, Kansas, New Jersey, Ohio, Utah, Missouri, Georgia and Massachusetts.

2.3.4 Direct Checks Unlimited, LLC (DCULLC)

Direct Checks Unlimited, LLC performs and coordinates manufacturing functions for Deluxe, including production scheduling and planning, design engineering, technical training, and other functions related to the manufacturing process. DCULLC sells its products to DEO. DCULLC operates manufacturing facilities in Kansas and Utah.

2.3.5 Deluxe Financial Services, LLC (DFS)

Deluxe Financial Services, LLC sells personal and business checks, check-related products and services, customer loyalty, retention and fraud monitoring and protection services, and stored value gift cards to financial institution customers. As part of check programs, DFS also offers enhanced services such as customized reporting, file management and expedited account conversion support. DFS serves approximately 6,000 financial institutions in the United States. Consumers and small businesses typically submit their check orders to their financial institution, which then forward the orders to DFS. DFS processes the orders and ships them directly to the consumers or small businesses. DFS produces a wide range of check designs, with many consumers preferring one of the dozens of licensed or cause-related designs Deluxe offers.

2.3.6 Deluxe Small Business Sales, Inc. (DSBS)

Deluxe Small Business Sales, Inc. operates under various brands including Deluxe®, NEBS®, McBee®, Stephen Fossler, PsPrint®, Logo Mojo®, Aplus.net ^SM and MerchEngines.com ^SM . DSBS provides personalized products and services that help small business customers operate, protect and grow their businesses. DSBS sells personalized printed product, which include business checks, printed forms, promotional products, marketing materials and related services, as well as retail packaging supplies and a suite of business services, including web design and hosting, fraud prevention, payroll, logo design, search engine marketing and business networking. Printed forms include billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. DSBS also sells computer forms compatible with accounting software packages commonly used by small businesses.

The majority of DSBS products are distributed through more than one channel. Primary channels include direct mail, in which promotional advertising is delivered by mail to small businesses, referrals from financial institutions and telecommunication companies, and internet marketing. These efforts are supplemented by the account development efforts of an outbound telemarketing group. DSBS also sells through websites. DSBS has been shifting a portion of its advertising efforts to the internet as customers are increasingly using the internet to procure products and services. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located throughout the United States.

DSBS has also expanded its marketing solutions and other services offerings to include technology-based solutions such as web service, web-to-print capabilities, internet marketing services and electronic checks. These marketing and other services account for approximately 12.5 percent of DSBS revenues.

Principal among these service offerings are the web-hosting services under the Hostopia® brand, where proprietary technology is used by smaller businesses to take a SaaS approach to launching a website, while larger businesses can leverage scalable advanced hosting features.

The VerticalResponse® portion of the DSBS business provides self-service marketing solutions for small businesses, including e-mail marketing, social media, on-line event marketing, postcard marketing and on-line surveys.

OrangeSoda® is the other major component of the DSBS marketing and other service offerings, providing internet marketing services such as search, mobile and social media campaign strategies.

2.3.7 Direct Checks Unlimited Sales, Inc. (DCUS)

Direct Checks Unlimited Sales, Inc. is the nation's leading direct-to-consumer check supplier, selling under various brand names including Checks Unlimited®, Designer® Checks, and Checks.com. Through these brands, DCUS sells personal and business checks and related products and services directly to consumers using direct response marketing and the Internet. DCUS estimates the direct-to-consumer personal check printing portion of the payments industry accounts for approximately 12 percent of all personal checks sold in the United States. DCUS uses a variety of direct marketing techniques to acquire new customers, including newspaper inserts, in-package advertising, statement stuffers and co-op advertising. DCUS also uses e-commerce strategies to direct traffic to their websites, which include checksunlimited.com, designerchecks.com, and checks.com.

2.3.8 ChecksbyDeluxe.com LLC (CBD)

ChecksByDeluxe.com, LLC sells checks directly to the consumer through the internet for DCUS. CBD’s customers include non-financial institutions. Orders are manufactured by DCULLC or DMO and shipped directly to the customer.

2.3.9 Safeguard Acquisitions, Inc. (SGACQ)

Safeguard Acquisitions, Inc. is a corporate development company that operates various company-owned distributors. These distributors offer products and services for small business customers ranging from printed forms, brochures, checks, promotional items, apparel and other business services. The company is based in Dallas, Texas.

2.3.10 Safeguard Business Systems, Inc. (SGINC)

Safeguard Business Systems, Inc. operates as a distributor and marketing entity in the U.S. SGINC sells business checks, tax forms, stationery, holiday cards, file systems, and other office commodity products. SGINC sells these products to small business customers, which generally have ten employees or less. Products are sold through a network of independent distributors that market products under the Safeguard brand name and Tommy Trojan trademark. The headquarters of the company is in Dallas, Texas, with administrative offices in Lansdale, Pennsylvania.

2.3.11 Safeguard Business Systems, Ltd. (SGLTD)

Safeguard Business Systems, Ltd. operates in Canada as a manufacturer and distributor of small business-oriented products such as business checks, tax forms, stationery, holiday cards, file systems, and other office commodity products.

2.3.12 Wausau Financial Systems, Inc. (WFS)

Wausau Financial Systems, Inc. provides financial technology services and solutions to financial institutions, healthcare and insurance companies, distribution and property management companies, utilities, government agencies, insurers, banks, and telecommunications companies. It offers Optima3 IMS, an enterprise content management solution that includes Accounts Payable Automation solution to streamline and simplify accounts payable processes; Human Resource Automation solution to streamline employee administration; Loan Automation solution to centralize and simplify internal and external processes of originating and managing loans; and New Account Automation solution to complete new-account transactions securely. The company also offers image and item processing products, including Deposit Processing solution to transform deposits into transactions for posting, electronic clearing, and archiving; Exception Processing solution for deposit processing; Returns Processing solution to automate returns using imaging and business rules; and products that digitize and integrate archive, analytics, and workflow monitoring in a single process. In addition, it provides remittance products, such as receivables management for corporations, retail and wholesale lockbox, and online billing solutions; and remote capture products, such as branch, remote deposit, remittance payment, and teller line capture solutions. Further, it provides receivables management solutions, lockbox outsourcing services, infrastructure consulting services, and support and education services. It sells scanner, check processing, and paperless branch equipment and supplies online. The company is based in Wausau, Wisconsin and has operated as a subsidiary of Deluxe Corp. since October 22, 2014.

2.3.13 Hostopia Canada, Corp. (HOST CAN)

Hostopia Canada, Corp. is a provider of Web services that enable small and medium-sized businesses to establish and maintain an Internet presence. HOST CAN’s customers are communication services providers, including telecommunication carriers, cable companies, Internet service providers, domain registrars, web hosting service providers, as well as small businesses. HOST CAN provides customers with the technology, infrastructure and support services to enable them to offer Web services and have Web presence, while saving them research and development and capital and operating costs typically associated with the design, development and delivery of Web services.

HOST CAN currently co-locates in four data centers with high levels of security, power and connectivity redundancy. HOST CAN operates in these facilities under service agreements that range from one to three years. HOST CAN leases space in Toronto, Canada in which it operates a data center facility located.

2.3.14 Hostopia Ireland, Ltd. (HOST IRE)

Hostopia Ireland, Ltd., located in Dublin provides comprehensive data hosting services and managed high-speed Internet connectivity for the Hostopia business platform.

2.3.15 NEBS Business Products, Ltd. (NEBS LTD)

NEBS Business Products, Ltd. designs, manufactures, and distributes personalized business products for small businesses in Canada. It offers various solutions to start a business, such as online incorporations, business name registrations, logo designs, business cards, domain name registrations, and email services; and products and services to manage a business, such as checks and deposit slips, forms, envelopes, office and retail supplies, labels, retail packaging, bags and bows, payroll and human resource services, and email and collaboration tools. It also provides solutions to enhance growth in a business, such as email marketing campaigns, Website hosting and design services, marketing and promotional products, gift certificates, occasion cards, holiday cards and calendars, stationery and business cards, color printing services, and promotional clothing. It serves the automotive, contract, hospitality, manufacturing and wholesale, retailing, and professional services industries. The company is based in Midland, Canada.

3. Industry Analysis

Deluxe operates primarily as part of the commercial printing industry in that it has historically generated a significant portion of its revenue from the sale of checks and business forms. These products continue to encompass over half of the Company’s total yearly revenue.

The printing of checks and business forms has been experiencing a major decline in the compound annual growth rate (“CAGR”) since 2000 as consumers are using alternative methods of payment than checks as well as shifting away from the use of preprinted business forms. From 2000 to 2012, the CAGR for checks paid was negative 6.6 percent, negative 3.0 percent from 2012 – 2015, negative 3.6 percent from 2015-2016, and negative 4.8 percent from 2016 to 2017. According to the most recent Federal Reserve study, released in January 2019, debit card, credit card and ACH payments all exceeded the number of checks written in 2015. Approximately 19.4 billion checks were written in 2015, accounting for approximately 13 percent of all non-cash payment transactions. This is a reduction from the Federal Reserve Study released in December 2013 when checks accounted for approximately 17 percent of all non-cash payment transactions.

3.1 Commercial Printing Services

This section provides an overview of buyer power, supplier power, substitutes, and competition (new entrants and current rivals) in the commercial printing industry.

3.2 Buyer Power

The commercial printing services market has many buyers including direct to consumers (generally any person with a bank account), small businesses, and financial institutions. Competition in the industry is fierce as there are low barriers to entry. Competitive factors include product line, delivery speed, quality, price, convenience, customer service and experience.

An increase in alternative methods of payment have had a significant effect on the decline in usage of checks by direct consumers, financial institutions, and small businesses alike. Alternative payment methods include credit cards, debit cards, direct deposit, wire transfers, internet-based bill paying services, and digital wallet applications. The increase in mergers among financial institutions has given buyers of direct checks an increased advantage as it gives banks the opportunity to renegotiate long term contracts (most contracts are for three to six years) to create more favorable terms (generally in the form of overall pricing reduction and cash incentives) which places a significant pricing pressure on check printers. Additionally, electronic transaction systems, off-the-shelf business software applications, web-based solutions, and mobile applications have been designed to replace pre-printed business forms. Greater acceptance of electronic signatures also contributes to the overall decline in printed products. It is difficult to predict the pace at which these alternative products and services will achieve widespread acceptance and replace standardized business forms.

Availability of alternative suppliers for accessories and other printed products is great, which also creates downward pricing pressure on products in this category. Businesses and governments continue to replace printed forms and documents with electronic versions. Office products, including stationery, calendars, business forms, business cards, and more are all decreasing in demand due to the availability of online and desktop software versions for printing.

The large number of suppliers and the low barriers to entry for new suppliers increases the bargaining power of customers. Based on the factors above, buyer power in this industry is high.

3.3 Supplier Power

Production personnel in commercial printing plants include employees with special skills in operating complicated machines, and lower-paid, relatively unskilled workers. Average hourly wages are slightly lower than the national average. Fringe benefits are an additional 19 percent of wages. Although some printing jobs are directly concerned with presses, an increasing number are in prepress design and layout that make greater use of computer skills. The number of people employed in commercial printing has declined in the last decade, as more of the work has become automated.

With the decline in demand for commercial printing services, specifically in direct checks and business forms, there is an increase in the need for customer service and sales personnel to maintain current relationships. Larger suppliers are pursuing cost reduction strategies and business simplification initiatives including automation and consolidation of production facilities, streamlining customer service and internal shared services, eliminating redundancies, and strengthening the ability to deliver new products to the marketplace.

Due to the large number of suppliers and decreasing demand, supplier power in this industry is low.

3.4 New Entrants

The commercial printing industry generally features low to medium barriers to entry, as the basic printing processes are well-known and small-scale equipment is relatively inexpensive. There are many small firms in this industry and a low level of market share concentration, given that the top four companies in the industry account for less than 15.0 percent of revenue. Therefore, major companies exhibit little market power.

The industry has a relatively low level of industry regulation; in general, printing companies face the same environmental regulations that apply to most US manufacturers. Barriers to entry, however, vary by industry segment and are relatively higher in the more capital-intensive segments. One of the most significant barriers to entry is capital investment in offset printing presses. Firms in capital-intensive segments usually deal with large customers, often on long-term contracts, and have large print capacities that can cost-effectively provide long print-runs. Consolidation is occurring in most of these segments, indicating that economies of scale and scope are increasing.

Barriers are relatively low in some segments, such as quick and digital printing. Online printers are emerging as major competitors in the short print-run space, and online operators can build significant economies of scale. Improved digital printing and more sophisticated workflow software are promoting shorter, digitally printed runs, which can affect demand for long-run offset printing services. Digital printing has low setup costs and can accommodate shorter runs while reducing warehousing costs.

The low barriers to entry in this industry are offset by the low profitability. Therefore, the threat of new entrants in this industry is moderate.

3.5 Substitutes

Increasingly, purchasers are choosing alternative forms of payments to writing checks, which has a direct impact on the need for printed checks by end consumers, financial institutions, and small businesses alike. In addition, steps have been taken in the development of a real-time payments system in the United States. The Federal Reserve established the Faster Payments Task Force with the objective of identifying and evaluating approaches for implementing a faster payments system and is encouraging the private sector to create real-time payment solutions. I n late 2017, The Clearing House Payments Company, LLC implemented a clearing and settlement system allowing consumers and businesses to send and receive payments in real- time directly from their accounts at financial institutions. The National Automated Clearing House Association adopted Same-Day ACH rules to speed up the processing of ACH payments, and systems such as PayPal®, Zelle®, Venmo®, Apple Pay® and various other mobile applications allowing individuals to transfer funds to other users. In addition, cryptocurrencies have been gaining acceptance in the marketplace. The rate and the extent to which alternative payment methods will achieve acceptance and replace checks, whether because of legislative developments, changing payment systems, personal preference or otherwise, cannot be predicted with certainty.

Additionally, purchasers in all three segments have increased availability of substitutes and alternative means to enact and record business transactions and print and use business forms. This is a direct result of the continual technological improvements. Access to lower price and higher performance capabilities of personal computers, printers and mobile devices, as well as electronic transaction systems, off-the-shelf business software applications, web-based solutions and mobile applications provide consumers with alternative means to printing many pre-printed business forms. Greater acceptance of electronic signatures also contributes to the overall decline of printed products.

Customers in the industry are very open to new technologies that increase effectiveness and lower costs. This pressure will only increase over time. Accordingly, the threat of substitutes in this industry is high.

3.6 Rivalry

As discussed, the commercial printing industry is highly fragmented, with the four largest printing companies accounting for just 15.0 percent of the industry’s revenue. Commercial printers in the United States are for the most part privately owned and on average generate less than $2.0 million in annual sales. Although they account for a marginal 2.0 percent share of industry revenue, the industry’s low barriers to entry and improvements in printing technology have also encouraged the entrance of non-employers, who represent more than half of all industry operators. Even among the remainder of the industry, small businesses dominate, with more than 70 percent of employing establishments in the industry possessing a workforce of fewer than ten people.

Nevertheless, because of consolidation and the exit from the market of underperforming printing presses, the number of industry companies is expected to fall at an annualized rate of 1.1 percent over the five years to 2019. This industry is expected to continue consolidating due to overcapacity and the rapid pace of technological change and digital media adoption. Rising barriers to entry and increasingly strategic and complex relationships with customers will also contribute to industry consolidation over the next five years.

Specific to the small business forms, accessories and other products market, major competitors include office product superstores, local printers, business forms dealers, and internet-based suppliers. The industry is highly fragmented and geographically dispersed. The check printing industry also houses considerable competition from a multitude of check printers, check printing software vendors and alternative payment methods. Check printing specific to financial institutions has two major players, one of which is Deluxe, though both players are seeing a decline in demand tied to the reduction in usage of checks as a form of payment.

The high number of suppliers and low growth rate in the industry increases competitive pressures. Thus, the level of rivalry in this industry is high, and will likely become more intense over time.

3.7 Key Success Factors

The industry dynamics described above have given rise to the following critical success factors in the commercial printing industry. These include brand management, effective sourcing, manufacturing and supply chain excellence, and appropriate pricing. These critical success factors are described below.

3.7.1 Brand Management

As demand for printed checks and business forms has declined, the Company recognizes the importance of developing and maintaining its brand portfolio to maintain its current customers and attract new customers. The Company has been investing in brand loyalty and awareness not just for printing checks and business forms, but to generate future growth in its marketing and business services segments.

3.7.2 Effective Sourcing

The primary materials used to produce the Company’s main products are paper, plastics, ink, cartons and printing plate material, which are purchased from various sources. Deluxe has entered agreements with third-party providers for information technology services, including telecommunications, network server, and transaction processing services, as well as to provide a portion of the data used to maintain its proprietary and non-proprietary databases, including credit and non-credit data from the national credit bureaus and other data brokers. The Company can obtain alternative sources of supply if one or more of its service providers failed to perform.

3.7.3 Manufacturing and Supply Chain Management

As demand for checks and printed forms continues to decrease and rivalry remains high, players in the industry must effectively manage costs. Costs can be managed through sourcing and manufacturing and supply chain management. Consolidation of tasks and entities, as well as effective coordination of production tasks enable better management of costs and pricing efforts.

3.7.4 Appropriate Pricing

As is often the case when there is a decrease in demand, many consumers will base their purchasing decisions solely on price. Competitive pricing is an important driver in optimizing profitability and allowing the Company to continue to remain relevant in the industry.

3.8 Conclusion

The decline in demand for printed material has accelerated over the past fifteen years. Along with other players in the commercial printing industry, Deluxe has experienced a decline in demand for printed checks and forms. As a result, growing the marketing solutions and business services product groups is of importance to the Company.

4. Functional Analysis

A functional analysis is a method of finding and organizing facts about a business in terms of its functions, risks and assets to identify how these characteristics are divided between the controlled parties involved in the Company’s intercompany transactions. The functional analysis provides the factual foundation for selecting and applying the transfer pricing method. The functional analysis identifies the functions performed, risks assumed, and assets utilized by the Company and how they are divided among the controlled parties involved in the Subject Transactions.

For reference, the table below summarizes the primary Deluxe Affiliates, the related party entities they transact with, and the Subject Transactions applicable. The functions, assets and risks of these entities are detailed in sections 4.1, 4.2, and 4.3 below:

4.1 Functions

The Company’s key functions include management and back office, IT, engineering, procurement, logistics and manufacturing and sales and marketing. These functions are discussed below.

4.1.1 Corporate Development

Overall strategy development for Deluxe is performed by the Corporate Development group, at DLX. The Corporate Development group is responsible for strategic planning, coordinating merger and acquisition efforts, organizing special projects, and forecasting company and industry trends. Corporate Development sets the overall direction for the company's internal strategic planning processes and outlines reporting deliverables for the business segments. Strategic planning is performed annually for the subsequent three-years. Additionally, Corporate Development identifies possible acquisitions, venture partners, and investment opportunities and supports transaction execution (buying and selling side).

Corporate Development's forecasting responsibilities include generating and presenting economic-based check usage forecasts and macroeconomic models to support overall planning for the business. Additionally, the Corporate Development group communicates relevant information to the Deluxe Affiliates by tracking and passing along information about competitors, industry, and other research-driven information. Corporate Development maintains a great deal of contact with the Company's executives to assess opportunities and possible action plans.

4.1.2 Finance/Accounting/Credit

DEO houses a Finance Shared Services (“FSS”) group, which provides various finance and accounting services to the Deluxe Affiliates including the following programs: Procure to Pay, Order to Cash, and Accounting to Reporting.

Procure to Pay activities performed by DEO for the Deluxe Affiliates include:

 Managing accounts payable,

 Administration of the corporate credit card program, and

 Processing vendor commissions.

The commissions group within Procure to Pay provides support to calculate commission payments using transactional invoice data, adjustment memos, financial requests, payback schedules, miscellaneous adjustments and correspondence with vendors and customers within the Financial Services segment. This group prepares backup documents for the monthly commission process, commission summaries, all expense documents, account rotation and commission transfer backup and detail.

Order to Cash activities performed by DEO for the Deluxe Affiliates include:

 Performing billing and cash application processes and customer credit and collection support;

 Responding to distributors via phone, email and fax regarding credit card and bank ACH information for payments to customer accounts;

 Updating customer data in the Business Process Control System ("BPCS") operating system to flag for future collection efforts;

 Completing customer account histories on excel spread sheets and emailing the information to customers/distributors;

 Forwarding calls to specific finance department staff to answer questions; and

 Providing customers with payment information from BPCS accounts receivable.

Accounting to Reporting provides accounting services to the Deluxe Affiliates, including:

 Managing ERP and consolidations,

 Fixed asset reporting, and

 Specialized accounting services involving contract acquisition costs, environmental reserves and restructuring issues.

In addition to the activities performed by the FSS group, DEO provides financial planning, analysis, forecasting and management reporting to other Deluxe Affiliates. DEO performs its own accounting, finance and credit services.

4.1.3 Administrative and Back Office Services

DLX and DEO provide various management services to the Deluxe Affiliates, including accounting, finance, human resource management, payroll, tax and legal services.

The Accounting Services group provides accounting, finance and credit services to the Deluxe Affiliates. The Accounting Services group supports the business via credit, collections and billing. The Accounting Services group also supports distributors through commission processing, payment facilitation and other adjustments. Accounting Services group responds to distributors via phone, email and fax regarding credit card and bank ACH information for payments to customer accounts. The Accounting Services group updates customer's data in the Business Process Control System ("BPCS") operating system to flag for future collection efforts; complete customer account histories on excel spread sheets and email the information to customers/distributors; forward calls to specific Finance department staff to answer questions; and provide customer/distributor with payment information from BPCS accounts receivable.

The commissions group provides support to calculate and remit cash flow to distributors on the 15th of every month for the prior month's business activities. Commission payments are calculated using transactional invoice data, adjustment memos, financial requests, payback schedules, miscellaneous adjustments and correspondence with distributors. This group prepares backup documents for the monthly commission process, commission summaries, all expense documents, account rotation and commission transfer backup and detail. CDs are created each month containing copies of all Commission Reports sent to distributors. Also, information is prepared and documented containing year-end reports with detail, including copies of the annual 1099 for each distributorship.

DLX also performs treasury activities for the Deluxe Affiliates, including managing acquisitions, cash and risk management, investor relations and financing ongoing operations.

4.1.4 Information Technology

DLX and DEO perform provide infrastructure-related IT services to the Deluxe Affiliates. IT services consist of data center operations, application maintenance and development, and distributed computing. DEO has one data center that has been outsourced to a third-party, First National Technology Solutions (“FNTS”), where customer data is sent electronically to the Company’s proprietary Customer Interface (“CI”) system. This system performs fraud checks, organizes data, and sends information to Deluxe manufacturing plants (DMO and DCULLC) based on plant utilization, zip code, financial institution, etc.

Application maintenance and development is also outsourced by DEO to a third-party, TCS. Activities performed by TCS include maintaining the CI software, financial institution mainframe and desktop order entry, and developing software for the Company’s internet-based order entry system, such as DLXport. DEO also outsources to a third-party for personal computer helpdesk support and on-call technicians for the Deluxe Affiliates.

HOST CAN is responsible for developing and maintaining the online platform for small business customers through both existing and new software and hardware. Small businesses use these platforms to build and manage an effective online presence. This is critical to HOST CAN and DSBS’s success as it is believed that the scalability and flexibility of the platform provides a key competitive advantage over competitors.

Over 80 percent of the Hostopia program management team is employed by HOST CAN. These employees are responsible for aiding partners and customers in migrating sites from their existing platform onto the Hostopia platform. Without this competency, it would be extremely difficult for the group to be effective in the wholesale market space.

4.1.5 Marketing

DLX and DEO are responsible for strategic marketing functions within the Company. The goal of DEO's marketing initiatives is to increase customer numbers in all business segments, including financial institution and small business customers. Strategic marketing initiatives established by DEO are communicated to the Deluxe Affiliates performing the sales functions (CBD, DCUS, DFS, DSBS, and SGINC), where each Affiliate’s respective sales force implements them.

DLX and DEO spend considerable time on marketing, brand development and awareness, and loyalty programs. In 2014 and 2015, DEO launched new brand awareness and positioning initiatives, centered around the celebration of the 100-year anniversary of Deluxe as a company. DEO also spearheaded marketing efforts in 2015 to begin the migration of the various separate Deluxe brands to new brands under a common Deluxe master brand umbrella.

Additionally, DEO hosts collaboration events in which DEO, financial institution decision makers, industry leaders, and keynote speakers participate to discuss current trends and/or topics of importance (both negative and positive) in the marketplace, as well as customer loyalty and consumer marketing. The purpose of these programs is to increase the Company’s presence in the industry as a partner to its customers and to, assist in solving some of the key challenges facing the industry to enhance the Company’s long-term business prospects.

DLX and DEO also host Deluxe Exchange education events, which allows financial institution customers to sign-up for seminars that include keynote speakers, conferences, publications and access to the Company’s knowledge sharing database. Specific to financial institutions, the strategic goal is to increase the Company’s customer retention rates. For Deluxe, the program increases the Company’s brand awareness among participants.

DLX and DEO also provide services to help financial institutions retain existing customers by providing inserts for several product-centered offers in the boxes of checks sent from Deluxe to a financial institution’s end user, as well as advertising in business and trade magazines.

DSBS is responsible for marketing services in the U.S. market under the Hostopia brand.

4.1.6 Engineering

DLX houses the Fulfillment Support organization, which works with and for the Fulfillment Operations departments at DMO and DCULLC. There are three managed engineering groups within Fulfillment Support today –Engineering Services and Support, Lean Engineering, and Product Engineering.

Engineering Services and Support group identifies external equipment and systems for purchase, as well as continued development and support of proprietary and industry specific technology. This team consists of mechanical, electrical, manufacturing and print systems engineers that recommend purchases, develop designs, build, support, train, deploy and refurbish manufacturing floor equipment. This group interfaces with vendors, consultants, suppliers and internal IT organization to meet the project and ongoing needs of manufacturing operations.

Lean Engineering group is responsible for optimizing manufacturing workflow processes, standardization, minimizing waste and the cost of manufacturing through the training, migration and maintenance of lean manufacturing disciplines. Lean Engineers at each manufacturing site (DMO and DCULLC) create and lead the ongoing culture of continuous improvement and innovation. They utilize cross-functional internal and external teams and subject matter experts to review potential and current issues, identify opportunities and establish a path to standardized change across operations.

The Product Engineering group is the intermediary between sales and marketing operations and manufacturing operations. They share information on products, growth and changing market needs for Fulfillment and Fulfillment Support teams. Product Engineering also maintains and supports documentation of existing products for equipment maintenance, reporting and process changes.

Each engineering group may work independently or form cross functional teams to complete projects and accomplish the Company’s strategic goals.

4.1.7 Production Planning

DMO and DCULLC coordinate production planning and scheduling for their plants independently, with some input from the strategic marketing group of DEO. Under the Company’s shared services business model, the manufacturing plants produce products based on factors such as the customer’s geographic location, the plant’s costs of production and market conditions. Previously, specific DMO and DCULLC plants would produce certain branded products.

4.1.8 Sourcing

Deluxe Supply Management functions are performed by DEO for DMO and DCULLC through DEO’s Supply Management/Sourcing group. The Sourcing group strategically sources raw, semi-finished, and finished goods including coated and uncoated paper, sheet tag, envelopes, security bags, corrugated boxes, flexible films, roll vinyl, leather, fabric and vinyl checkbook covers, and folding boxes. DEO attempts to match optimum price with demand needs and maintain relationships with quality suppliers who deliver in a timely manner and whose products have few defects. DEO negotiates all procurement contracts for the Company.

The primary raw materials used to produce the Company’s products are paper, ink and cartons. The Supply Management/Sourcing group arranges contracts for the Deluxe Affiliates to purchase these products from various third-party sources. Additionally, the Sourcing group utilizes a paper printing plate material that is available from a limited number of sources.

When determining suppliers of goods or services, the Sourcing group issues a request for proposal and compares bids received. Once a supplier has been selected, DEO negotiates a contract. The Sourcing group places orders with suppliers based on the demand forecasts communicated by Deluxe. The suppliers then provide DMO and DCULLC with the raw materials to be used in production. The Sourcing group organizes purchase and shipment for over 90 percent of direct materials for Deluxe manufacturing operations.

Once a relationship with a supplier has been established, the product purchase team assigned to that specific good or service within the Sourcing group is responsible for maintaining the relationship for the Company. Currently, DEO maintains 700 strategic supplier relationships for its raw materials and the Sourcing group is actively working to narrow the Company’s supplier base to reduce its list of preferred vendors.

4.1.9 Manufacturing

The Company’s primary manufacturers, DMO and DCULLC, have invested heavily in production equipment and technology to reduce costs and increase productivity. There has been a conversion to a cellular manufacturing environment in all facilities. Within the cellular manufacturing environment, a group of employees work together to produce products, rather than a single employee working on individual tasks in a linear fashion., This results in improvements in quality and service levels and reductions in costs because employees assume more ownership of the product.

Personal Check Manufacturing

The personal check manufacturing process is the most automated process within DMO and DCULLC due to its high volume and relatively standardized products. Orders are captured through the CI system and consolidated into batches of 12 similar customer orders, by design, quantity, and customer geographic area. Batch orders are then transmitted by DEO to a DMO or DCULLC plant, where proof sheets are created. Plant personnel manually check the proof sheets for errors. Once proofs are accepted, plates are made for the batch orders. The batch orders are transmitted to the press, the plate is loaded into the machine, and the machines begin printing the batch orders. Generally, check printing is done on offset printing presses; however, digital printing machines are also utilized. The presses are capable of various printing options, including colors, fonts, and customer-specific messages. Once printed, the batch orders go through automatic collating and tagging functions and then through automatic binding/taping and packaging functions. Finally, orders are manually checked for quality, sorted, and shipped to the end-customer.

Small Business Products Manufacturing

Due to increased variability of products ordered, the small business products manufacturing process requires a greater variety of machines and manual processes to accommodate the customized nature of the products. The process has the same front-end functions as the check printing manufacturing process. Orders are captured by DEO electronically through a customer call center or the internet and transmitted to a plant. Proof sheets are created and checked for quality by personnel at DMO and DCULLC. Designs are loaded into the machines and printing begins. Small business product machines are capable of many printing options, due to the customized nature of the products. Options include colors, fonts, customer-specific messages, and any other printing features. In addition to offset printing machines, the small business products manufacturing process also utilized digital printing machines. Unlike the check printing process, binding and packaging functions are manual for small business products due to the variety of styles and quantities. Finally, orders are manually checked for quality, sorted, and shipped to the end-customer.

4.1.10 Sales and Distribution

Sales activities are undertaken by DFS, DSBS, DCUS and CBD.

DFS sells checks and related products directly to financial institutions who have a corporate supply contract in place with DFS. DFS field sales staff work with financial institution branches to help them increase new customer accounts and maintain existing customer accounts.

DSBS acquires new customers through various channels, including financial institution referrals, direct advertising, dealers, distributors, brokers, and other alliances (e.g., Microsoft Money ^TM forms, software firm forms, etc.) and sells under Deluxe brands as well as Hostopia. DSBS estimates that approximately 50 percent of its customers will not be returning customers. Additionally, the small businesses environment is dynamic; firms constantly come and go. These factors greatly influence DSBS's sales functions. When a new, small business opens an account at a financial institution, the financial institution refers the customer to DSBS and provides DSBS with the customer’s information in exchange for a commission. Thus, DSBS can either serve the financial institution customer directly, or the financial institution will act as an intermediary and provide DSBS with its customers’ orders. Sales via financial institutions represent approximately 15 percent of DSBS’s revenue. The other 85 percent of DSBS's revenue is generated by the direct advertising sales channel. Generally, direct mailings are sent to referral customers and advertisements are inserted into papers. These customers usually place orders with DSBS through DSBS's call centers. Additionally, DSBS places outbound telemarketing calls to small businesses. Prices for products sold by DSBS are set by DSBS. DSBS sells products to small business customers at retail prices.

DCUS sells products to consumers through specific direct marketing programs and campaigns. Activities include creating advertising inserts for Sunday newspapers and coupon inserts for ValPak, distributing catalogs, and maintaining the customer websites. DCUS aims to drive consumers to call its call centers and visit its website. DCUS focuses its advertising effort on rural and suburban areas as compared to urban areas where debit and credit card use is more popular. DCUS's customers seek check designs and lower prices compared to convenience-oriented consumers who order checks through their financial institutions. Prices for products sold by DCUS are set by DCUS. DCUS sells products to its customers at retail prices with a strategy of selling at a lower or discounted price for initial orders and higher prices for repeat orders.

Marketing initiatives, such as advertising campaigns, industry seminars, and other marketing tools are generally dictated by DEO for DFS, DSBS and DCUS. Products sold by these entities are purchased from DEO and shipped directly to the customer from a Deluxe manufacturing plant.

DCUS sells checks and related products directly to CBD. CBD solicits retail sales through customer facing websites. Prices for products sold by CBD are set by CBD. CBD sells its products to its customers at retail prices with a strategy of selling at a lower or discounted price for initial orders and higher prices for repeat orders. Products sold by CBD are purchased from DCUS and shipped to third-party customers.

HOST CAN works with DSBS to develop strategies to acquire new customers, further penetrate the existing end-user base of wholesale customers to grow average revenue per end-user and pursue appropriate business acquisitions to accelerate growth. HOST CAN signs its own contracts and is responsible for maintaining its own client relationships.

4.1.11 Order Fulfillment

Customer orders are fulfilled in different ways depending on the business segment.

CBD, DCUS and DSBS orders are placed through call centers or online. In the case where customers make calls to a call center, the sales agent takes the customer’s orders and attempts to sell additional products. The sales agent will enter relevant data into the CI system at DEO. The CI system then electronically sends order data to Deluxe manufacturing plants (DMO or DCULLC). Orders that are received via the internet are sent directly to a Deluxe manufacturing plant.

DFS orders are obtained through call centers, direct mail, or online at the DFS or a financial institution website. Data for these orders is entered into the CI system, which electronically sends order data to a Deluxe manufacturing plant. In the case where customers make calls to one of DFS's call centers, the sales agent takes customer orders and attempts to sell additional products. Most call centers operate under the Deluxe brand name; however, some call centers operate under a financial institution’s brand name or under a co-branded name (i.e., both DFS and financial institution’s brand names are used). Prices for products sold by DFS are set as outlined in the contracts that DFS has negotiated with the financial institutions.

Once product production is complete, finished products are shipped directly to the end-user from the Deluxe manufacturing plant. The U.S. Postal Service is used to ship personal check boxes, while UPS is used primarily to ship all small business products. Delivery methods and shipping instructions are dictated through order capture system. The system also provides for any additional delivery costs due to special shipping methods.

HOST CAN maintains a call center in Canada specifically dedicated to Hostopia business sales and customer support.

4.1.12 Technical Support

All the technical support agents are employees of HOST CAN. A competent and friendly call center is crucial to maintaining existing customer relationships. Lack of an effective call center would result in an increased turnover of customers.

4.2 Assets

The Company’s primary tangible assets consist of land, buildings, and machinery and equipment. Tangible assets also include internal-use software and inventory and supplies related to corporate shared services functions of manufacturing, information technology, and real estate.

The Company’s primary intangible assets are its customer lists, tradenames and trademarks, software, and manufacturing technology. Most of these intangibles are owned by DLX and DEO. DEO's IP consists of a combination of trademark and copyright laws, trade secret protection, patents, confidentiality and license agreements, and manufacturing knowhow. DEO owns the rights to, maintains, and protects this IP within the United States.

Deluxe relies on a combination of trademark and copyright laws, trade secret and patent protection, and confidentiality and license agreements to protect our trademarks, software and other IP. These protective measures afford only limited protection. Third parties may infringe or misappropriate the Company’s IP or otherwise independently develop substantially equivalent products or services that do not infringe on Deluxe-owned IP rights, either of which may adversely impact the results of the Company’s operations. Additionally, Deluxe may be the target of the aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Check designs licensed from third parties account for a portion of the Company’s revenue. These license agreements generally average two to three years in duration and there is no guarantee that such licenses will be available indefinitely or under terms that would allow the Company to continue to sell the licensed products profitably. If the Company were to lose the rights to a significant portion of its licensed check designs, it may adversely impact the Company’s profit.

4.2.1 Trademarks / tradenames

DEO owns several valuable trademarks, tradenames and service marks, including:

Deluxe®

NEBS®

PsPrint®

ChecksUnlimited®

Designer Checks®

Checks.com®

The foreign entities have retained their own trademarks, including Safeguard®, Hostopia® and VerticalResponse®.

4.2.2 Manufacturing Technology

DEO owns the right to a proprietary printing press Deluxe Computer Offset Press ("DCOP"). DCOP was designed in the United States by DEO several years ago. A third party manufactures the press, and DEO then customizes it. The DCOP uses a unique combination of lithography and imprinting. Lithography is used to print the name, address and institutional information on the check. Imprinting uses magnetic ink and is used for the account tracking data on the bottom of the check. The DCOP is computer controlled and is a high-speed and highly automatic press. The competitive advantage of the DCOP is the customized magnetic ink character recognition ("MICR") process that prints the banking numbers at the bottom of the checks. Deluxe's MICR technology is the best in the industry and provides a significant advantage over its competitors.

Safeguard has a proprietary security feature that is unique in the industry; a seal that appears on the face of the check that uses thermo chromatic ink. The patented manufacturing process produces heat-sensitive checks for security purposes. DEO owns these technologies.

4.2.3 Customer Lists

DEO owns and maintains significant customer lists and data in each of its major business segments. In the Small Business Service segment, Deluxe has provided products and services to more than 4.4 million small business customers over the past 24 months. In a similar frame, DCUS has provided products and services to more than 5.1 million customers. DFS provides products and services to approximately 4,900 financial institution clients.

4.2.4 Proprietary Software

DEO owns and maintains valuable internal use software related to its various ordering and manufacturing platforms. Such platforms, including the proprietary CI ordering software are utilized across all the business segments.

In the Small Business Service segment, DSBS owns internally developed software related to its webhosting (Hostopia), e-mail marketing (VerticalResponse) and search engine marketing (OrangeSoda).

In the Financial Services segment, DFS owns proprietary software utilized in the provision of its Deluxe Rewards engagement/loyalty services provide to financial institutions. This software includes fully integrated redemption services and fulfillment modules used to help financial institutions manage customer engagement and loyalty programs.

Further, in the Financial Services segment, Wausau has developed proprietary software and systems used in its provision of lockbox, remote deposit capture and paperless accounts receivable management services to financial institution clients.

4.3 Risks

Business risks are those circumstances that may expose a company to the possibility of loss or damage. The risks borne by the Company are discussed below.

4.3.1 Credit Risk

Credit risk occurs when a company assumes financial responsibility for the late payment or nonpayment of accounts receivable. In general, credit risk is minimal. DFS bears the risk of non-payment by financial institution clients. CBD and DCUS sell directly to consumers, and thus bear the risk of non-payment by customers. Since DMO and DCULLC sell the products they manufacture to the Affiliates at a cost-plus markup, they do not bear credit risk. Historically, these risks have been minimal for the Company.

4.3.2 Inventory Risk

Inventory risk relates to the losses associated with carrying raw materials and finished product inventory. Losses include obsolescence, shrinkage, or market collapse such that products are only salable at prices that produce a loss.

DFS, DSBS and DCUS take title to goods from DEO as the goods are shipped from DMO and DCULLC to end customers. CBD takes title to goods from DCUS as the goods are shipped from DMO and DCULLC to end customers. DCULLC and DMO bear the risks associated with holding raw materials inventory. DCULLC and DMO use a just-in-time inventory management system to minimize inventory risks. Finished product inventory risk is minimal as title passes from DMO or DCULLC to related parties at product completion.

4.3.3 Product Warranty & Liability Risk

Product warranty and liability risk exists when a company is financially responsible for any warranty and liability issues arising from the sale of a certain product. DFS, DCUS, CBD and DEO bear risks associated with errors in order entry and order processing. DMO and DCULLC each bear the risks of defective products. Other product warranty and liability risks are borne by the selling entity. Historically, product warranty and liability losses have been minimal and are expected to continue to be low.

4.3.4 Manufacturing Failure Risk

Manufacturing failure risk relates to the losses associated with failed or spoiled batch orders due to errors that occurred during the manufacturing process. DMO and DCULLC each bear the risks associated with failed batches, raw materials waste, damaged machines, and human errors associated with the manufacturing process. This risk has been historically low, and even lower with recent manufacturing improvements.

4.3.5 Foreign Exchange Risk

A company is exposed to foreign exchange risk if its profits are affected, beyond its own control, by fluctuations in currency rates. While a company can often manage short-term foreign exchange risk for many currencies by hedging, it may be unable to eliminate its risk if most of its customers are located outside of its country. HOST CAN does not currently actively manage the United States – Canadian dollar exchange rate risk using financial instruments. HOST CAN earns significant revenue and pays significant expenses in Canada and substantially all the employees are in Canada and are paid in Canadian dollars. However, since it is remunerated based on a markup on its total costs, HOST CAN foreign exchange risk is limited.

4.3.6 Market Risk

Market risk arises when a company is subject to adverse sales conditions due to increased competition, declining conditions within the market or the inability to develop markets or position products to reach targeted customers. Demand for checks and forms may continue to decline as the federal government begins to develop an initiative to develop infrastructure for real-time payments. As there are relatively low barriers to entry for the provision of basic Web services, competition is expected to increase from both established and emerging companies. All Company entities face these risks. These risks are believed to be commensurate with those of other industry participants.

5. Benchmarking Data

In conducting the economic analysis that determined whether transfer pricing between the Company’s entities has been conducted at arm’s length, the Deluxe Corporation utilized the searches below. The sections below describe the benchmark searches developed for the Company’s intercompany transactions. The identification of tested party, selection of method, application of method, selection of profit level indicator, and selection of number of years of comparison are addressed in the local country reports.

We searched the Standard & Poor’s Capital IQ platform (“CIQ”) to identify benchmark companies that perform broadly similar functions to a management and back office services provider . CIQ provides historical and current information on more than 60,000 public companies and two million private firms as well as stock reports on more than 4,000 leading public equities across the globe.

In performing our benchmarking studies, we utilized Standard Industrial Classification (“SIC”) codes. SIC codes are used by the Federal Government to identify and classify specific categories of business activity that represent the primary line of business of a firm. Therefore, utilizing SIC codes affords entity comparisons within such sectors. Major sectors are categorized under two-digit SIC codes, while sub-sectors are categorized under extended three and four-digit SIC codes.

5.1 North Ameri ca Management and Back Office Services

In performing our search for comparable management & back office services providers, we utilized the following industry groups:

 736: Personnel Supply Services

 811: Legal Services

 872: Accounting, Auditing, and Bookkeeping Services

We also used the SIC codes below:

 7371: Computer Programming Services

 7373: Computer Integrated Systems Design

 7374: Data Processing & Preparation

 7389: Business Services, Not Elsewhere Classified

 8741: Management Services

 8742: Management Consulting Services

 8748: Business Consulting, nec

We also used screens to eliminate companies who were not classified as operating and companies whose consolidated and unconsolidated operating revenue were missing for two or more years. These screens identified 132 companies for further review.

A screenshot of the search is shown below:

We reviewed the business descriptions of the potential benchmark companies to evaluate the similarity of the functions, assets and risks of these companies to management services providers. This step eliminated 117 companies.

For the remaining companies, we reviewed annual reports and company websites to clarify the companies’ activities. The table below presents a summary of the search process.

Summary of the benchmark company search and evaluation process

After applying the screens defined above, fifteen companies were selected as benchmark companies. We consider the companies below suitable to benchmark the returns on providers of management and back office services:

1. ASGN Inc.

2. Barrett Business Services, Inc.

3. CBIZ, Inc.

4. CRA International, Inc.

5. FTI Consulting, Inc.

6. Huron Consulting Group

7. ICF International Inc

8. Insperity Inc

9. Kelly Services, Inc.

10. Kforce Inc.

11. ManpowerGroup Inc.

12. Navigant Consulting, Inc.

13. Resources Connection, Inc.

14. Robert Half International Inc.

15. Sykes Enterprises, Incorporated

Appendices 1–2 respectively provide: 1) the potential comparables' selection matrix, with exclusion rationales, and 2) the selected comparables' business descriptions, and financials.

The ROTC was selected as the appropriate PLI to determine arm’s length returns for management and back office functions. The IQR of the ROTC over the most recent three-year period of available data was calculated. The table below presents the single-year and weighted average ROTCs of the comparables:

Management & back office services companies generated a three-year, weighted average, ROTC IQR extending from 4.4 to 9.2 percent, with a 6.4 percent median.

5.2 North America Manufacturing

In performing our search for comparable contract manufacturers, we searched the following SIC codes and SIC Major Groups:

 Major Group 26: Paper and Allied Products

 Major Group 27: Printing, Publishing, and Allied Industries

We also used screens to eliminate companies who were not classified as operating and companies whose consolidated and unconsolidated operating revenue were missing for two or more years. These screens identified 65 companies for further review.

A screenshot of the search is shown below:

We reviewed the business descriptions of the potential benchmark companies to evaluate the similarity of the functions, assets and risks of these companies to manufacturers. This step eliminated 58 companies.

For the remaining companies, we reviewed annual reports and company websites to clarify the companies’ activities. The table below presents a summary of the search process.

Summary of the benchmark company search and evaluation process

After applying the screens defined above, seven companies were selected as benchmark companies. We consider the companies below suitable to benchmark the returns on providers of manufacturing activities:

1. Domtar Corporation

2. Ennis, Inc.

3. Impreso, Inc

4. Quad/Graphics, Inc.

5. RR Donnelley & Sons Co.

6. Supremex, Inc.

7. Transcontinental Inc.

Appendices 3–4 respectively provide: 1) the potential comparables' selection matrix, with exclusion rationales, 2) the selected comparables' business descriptions and financials.

The ROTC was selected as the appropriate PLI to determine arm’s length returns for contract manufacturing functions. The IQR of the ROTC for the most recent three-year period of available data was calculated. The table below presents the single-year and weighted average ROTCs of the comparables:

Contract manufacturers generated a three-year, weighted average, ROTC IQR extending from 3.8 to 14.0 percent, with a 6.4 percent median.

5.3 North America Marketing Services

In performing our search for comparable marketing services providers, we utilized the following industry groups:

 731: Advertising and

 899: Miscellaneous Services

We also utilized the following SIC codes:

 7320: Credit Reporting & Collection

 7322: Adjustment & Collection Services

 7331: Direct Mail Advertising Services

 7370: Computer & Data Processing Services

 7374: Data Processing & Preparation

 7389: Business Services, Not Elsewhere Classified

 8721: Accounting, Auditing & Bookkeeping

 8732: Commercial Nonphysical Research

 8740: Management & Public Relations

 8741: Management Services

 8742: Management Consulting Services

 8743: Public Relations Services

 8748: Business Consulting, nec

In addition, we also searched the following CIQ Industry Classification:

- Online Transportation Booking Services

We also used screens to eliminate companies who were not classified as operating and companies whose consolidated and unconsolidated operating revenue were missing for two or more years. These screens identified 123 companies for further review.

A screenshot of the search is shown below:

We reviewed the business descriptions of the potential benchmark companies to evaluate the similarity of the functions, assets and risks of these companies to marketing services providers. This step eliminated 117 companies.

For the remaining companies, we reviewed annual reports and company websites to clarify the companies’ activities. The table below presents a summary of the search process.

Summary of the benchmark company search and evaluation process

After applying the screens defined above, six companies were selected as benchmark companies. We consider the companies below suitable to benchmark the returns on providers of marketing services :

1. Advantex Marketing International, Inc.

2. Affinion Group Inc

3. Alliance Data Systems Corporation

4. Fluent, Inc.

5. Harte-Hanks, Inc.

6. Points International Ltd.

Appendices 5–6 respectively provide: 1) the potential comparables' selection matrix, with exclusion rationales, and 2) the selected comparables' business descriptions, and financials.

The ROTC was selected as the appropriate PLI to calculate an arm’s length return for performing marketing functions. The IQR of the ROTCs over the most recent three-year period of available data was calculated. The table below presents the single-year and weighted average ROTCs of the comparables.

Marketing companies generated a three-year, weighted average, ROTC IQR extending from negative 2.3 to 9.7 percent, with a 5.4 percent median.

5.4 North America Sales – Wholesale / Direct Marketing

In performing our search for comparable wholesale / direct marketing services providers, we utilized the following SIC Industry Groups:

 511: Wholesale - Paper and Paper Products

 519: Wholesale - Miscellaneous Non-Durable Goods

 596: Wholesale – Non-store retailers

And we utilized the following SIC codes:

 5000: Wholesale – Durable Goods

 5045: Wholesale - Computers, Peripherals & Software

 5941: Wholesale - Sporting Goods Stores and Bicycle Shops

 5942: Wholesale - Book Stores

 5943: Wholesale - Stationery Stores

We also used screens to eliminate companies who were not classified as operating and companies whose consolidated and unconsolidated operating revenue were missing for two or more years. These screens identified 151 companies for further review.

A screenshot of the search is shown below:

We reviewed the business descriptions of the potential benchmark companies to evaluate the similarity of the functions, assets and risks of these companies to wholesale distributors. This step eliminated 135 companies.

For the remaining companies, we reviewed annual reports and company websites to clarify the companies’ activities. The table below presents a summary of the search process.

Summary of the benchmark company search and evaluation process

After applying the screens defined above, sixteen companies were selected as benchmark companies. We consider the companies below suitable to benchmark the returns on providers of wholesale distribution activities :

1. ADDvantage Technologies Group, Inc.

2. Applied Industrial Technologies, Inc.

3. EACO Corporation

4. HD Supply Holdings, Inc.

5. Houston Wire & Cable Company

6. InnerWorkings, Inc.

7. Lawson Products, Inc.

8. MRC Global Inc.

9. MSC Industrial Direct Co., Inc.

10. ScanSource, Inc.

11. SiteOne Landscape Supply, Inc.

12. SPAR Group, Inc.

13. Surge Components, Inc.

14. Tech Data Corporation

15. Uni-Select Inc.

16. Veritiv Corporation

Appendices 7–8 respectively provide: 1) the potential comparables' selection matrix, with exclusion rationales, 2) the selected comparables' business descriptions and the financials.

The operating margin (“OM”) was selected as the appropriate PLI to calculate an arm’s length return for wholesale / direct marketing functions. The IQR of the OM over the most recent three-year period of available data was calculated. The table below presents the single-year and weighted average OMs of the comparables.

Wholesale / direct marketing companies generated a three-year, weighted average, OM IQR extending from 1.5 to 6.2 percent, with a 2.4 percent median.

5.5 North America Sales – Retail – Direct to Business

In performing our search for comparable retail distribution companies, we utilized the following SIC Industry Groups:

 511: Paper and Paper Products

And we utilized the following SIC codes:

 5045: Wholesale - Computers, Peripherals & Software

 5940: Wholesale - Miscellaneous Shopping Good Stores

 5943: Wholesale - Stationery Stores

 5960: Wholesale - Nonstore Retailers

 5961: Wholesale - Catalog & Mail Order Houses

 5963: Wholesale – Direct Selling Establishments

 5990: Wholesale – Retail stores

 7370: Services – Computer & Data Processing Services

In addition, we also searched the following CIQ Industry Classification:

- Online Office Product and Supply Retail

- Online Paper Product Retail

- Online Stationery Retail

We also used screens to eliminate companies who were not classified as operating and companies whose consolidated and unconsolidated operating revenue were missing for two or more years. These screens identified 138 companies for further review.

A screenshot of the search is shown below:

We reviewed the business descriptions of the potential benchmark companies to evaluate the similarity of the functions, assets and risks of these companies to retail distributors This step eliminated 129 companies.

For the remaining companies, we reviewed annual reports and company websites to clarify the companies’ activities. The table below presents a summary of the search process.

Summary of the benchmark company search and evaluation process

After applying the screens defined above, nine companies were selected as benchmark companies. We consider the companies below suitable to benchmark the returns on providers of retail distribution activities:

1. Amazon.com, Inc.

2. Bluestem Group Inc.

3. Indigo Books & Music Inc.

4. Office Depot Inc

5. PC Connection, Inc.

6. PCM Inc

7. School Specialty, Inc.

8. Stamps.com Inc.

9. Systemax Inc.

Appendices 9–10 respectively provide: 1) the potential comparables' selection matrix, with exclusion rationales, and 2) the selected comparables' business descriptions and financials.

The OM was selected as the appropriate PLI to calculate an arm’s length return for performing retail functions. The IQR of the OM over the most recent three-year period of available data was calculated. The table below presents the single-year and weighted average OMs of the comparables:

Retail companies generated a three-year, weighted average, OM IQR extending from 1.4 to 3.9 percent, with a 3.1 percent median.

5.6 North America IT Services

In performing our search for comparable IT services providers, we searched the following SIC codes:

 7361: Employment Agencies

 7370: Computer & Data Processing Services

 7371: Computer Programming Services

 7373: Computer Integrated Systems Design

 7374: Data Processing & Preparation

 7379: Computer Related Services, nec

 7389: Business Services, Not Elsewhere Classified

 8741: Management Services

 8742: Management Consulting Services

We also used the following CIQ industry classification:

 IT Consulting and Other Services

We also used screens to eliminate companies who were did not have a market capitalization greater than 0 and who had an R&D/sales ratio greater than five percent. These screens identified 171 companies for further review.

A screenshot of the search is shown below:

We reviewed the business descriptions of the potential benchmark companies to evaluate the similarity of the functions, assets and risks of these companies to IT services providers distributors. This step eliminated 163 companies.

For the remaining companies, we reviewed annual reports and company websites to clarify the companies’ activities. The table below presents a summary of the search process.

Summary of the benchmark company search and evaluation process

After applying the screens defined above, eight companies were selected as benchmark companies. We consider the companies below suitable to benchmark the returns on providers of IT services :

1. Cognizant Technology Solutions Corp

2. Genpact Limited

3. Information Services Group, Inc.

4. Mastech Holdings, Inc.

5. Perficient, Inc.

6. The Hackett Group, Inc

7. Virtusa Corporation

8. Wistron Information Technology & Services Corporation

Appendices 11–12 respectively provide: 1) the potential comparables' selection matrix, with exclusion rationales, and 2) the selected comparables' business descriptions and financials.

The ROTC was selected as the appropriate PLI to calculate an arm’s length return for performing IT functions. The IQR of the ROTC over the most recent three-year period of available data was calculated. The table below presents the single-year and weighted average ROTCs of the comparables.

IT companies generated a three-year, weighted average, ROTC IQR extending from 4.3 to 15.0 percent, with a 6.3 percent median.

6. Appendices

Appendix 1: Management & Back Office Services Potential Comparables' Selection Matrix

‎

Appendix 2: Management & Back Office Services Selected Comparables' Business Descriptions and Financial Data

CIQ Business Description:

ASGN Incorporated provides information technology (IT) and professional staffing services in the technology, digital, creative, engineering, and life sciences fields across commercial and government sectors in the United States and internationally. The company operates through Apex, Oxford, and ECS segments. The Apex segment offers technical, scientific, digital, and creative services and solutions for contract, contract-to-hire, and permanent placement positions to Fortune 1000 and mid-market clients. The Oxford segment provides specialized staffing and permanent placement services in the areas of technical, digital, engineering, and life sciences resources and consulting in various skill and geographic markets. The ECS Segment delivers advanced solutions in cloud, cyber security, artificial intelligence, machine learning, software development, IT modernization, and science and engineering, as well as focuses on federal government activities. The company was formerly known as On Assignment, Inc. and changed its name to ASGN Incorporated in April 2018. ASGN Incorporated was founded in 1985 and is headquartered in Calabasas, California.engineering, and regulatory and compliance consultants to clients for temporary assignments; provides permanent placements in engineering, technology, sales, executive, financial, accounting, scientific, legal, and operations positions; and offers locally-based contract and permanent life science professionals to clients in biotechnology, pharmaceutical, food and beverage, personal care, chemical, medical device, automotive, municipal, education and environmental industries. The company was founded in 1985 and is headquartered in Calabasas, California

‎

CIQ Business Description:

Barrett Business Services, Inc. provides business management solutions, such as human resource outsourcing and professional management consulting for small and medium-sized businesses in the United States. The company offers professional employer services under which it enters into a client services agreement to become a co-employer of the client's existing workforce, assuming responsibility for payroll, payroll taxes, workers' compensation coverage, and certain other administration functions. It also provides staffing and recruiting services, such as on-demand or short-term staffing assignments, contract staffing, long-term or indefinite-term on-site management, and direct placement. The company serves electronics manufacturers, various light-manufacturing industries, agriculture-based companies, transportation and shipping enterprises, food processing, telecommunications, public utilities, general contractors in various construction-related fields, and professional services firms. Barrett Business Services, Inc. was founded in 1965 and is headquartered in Vancouver, Washington.

‎

CIQ Business Description:

CBIZ, Inc., a diversified services company, through its subsidiaries, provides professional business services, products, and solutions to businesses, individuals, governmental entities, and not-for-profit enterprises in the United States and Canada. The company offers its integrated services through four practice groups: Financial Services, Employee Services, Medical Management Professionals, and National Practices. The Financial Services practice group offers accounting, tax, financial advisory, valuation, litigation support, government health care consulting, and risk and real estate advisory services. The Employee Services practice group provides employee benefits, property and casualty, retirement plan, payroll, life insurance, human capital, compensation consulting, recruiting, and actuarial services. The Medical Management Professionals practice group offers coding and billing, accounts receivable management, and full practice management services for hospital-based physicians primarily in the practice of radiology, emergency medicine, anesthesiology, and pathology. The National Practices practice group provides managed networking and hardware, health care consulting, and mergers and acquisitions services. CBIZ, Inc. was founded in 1987 and is headquartered in Cleveland, Ohio.

‎

CIQ Business Description:

CRA International, Inc., doing business as Charles River Associates, provides economic, financial, and management consulting services primarily in the United States, the United Kingdom, and internationally. It advises clients on economic and financial matters pertaining to litigation and regulatory proceedings; and guides corporations through critical business strategy and performance-related issues. The company offers consulting services, such as research and analysis, expert testimony, and support in litigation and regulatory proceedings in various areas of finance, accounting, economics, insurance, and forensic accounting and investigations to corporate clients and attorneys. It also provides consulting services related to class certification, damages analysis, expert reports and testimony, regulatory analysis, strategy development, valuation of tangible and intangible assets, risk management, and transaction support to law firms, businesses, and government agencies. In addition, the company offers management consulting services, including strategy development, performance improvement, corporate strategy and portfolio analysis, market demand estimation, new product pricing strategies, intellectual property and other assets, assessment of competitors' actions assessment, and new sources of supply analysis. It serves customers in banking and capital markets, chemicals and industrials, consumer products, energy and utilities, financial services, health care, insurance, life sciences, manufacturing, media, mining, metals and materials, oil and gas, real estate, retail, sports, telecommunications, and transportation industries. CRA International, Inc. was founded in 1965 and is headquartered in Boston, Massachusetts.

CIQ Business Description:

FTI Consulting, Inc. operates as a business advisory firm enabling organizations to protect enterprise values in complex economic, legal, and regulatory environments worldwide. It operates in five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. The Corporate Finance/Restructuring segment provides restructuring and turnaround, bankruptcy support, interim management, transaction advisory, performance improvement, private equity sponsor, and real estate and financial advisory services. The Forensic and Litigation Consulting segment offers forensic accounting and advisory; global risk and investigations practice; dispute advisory; intellectual property related; civil trial; construction related dispute resolution; financial and data enterprise analysis; and compliance, monitoring, and receivership services, as well as health solutions. The Economic Consulting segment provides financial, economic, and econometric consulting services; business valuation and expert testimony services; international arbitration; economic and statistical analyses services for labor and employment issues; and offers services related to public policy and regulated industries, as well as securities litigation and risk management services. The Technology segment offers computer forensics and investigations, discovery consulting, and e-discovery software and services. The Strategic Communications segment provides advice and consulting services relating to financial and corporate communications, public affairs, creative engagement, and strategy consulting and research. FTI Consulting, Inc. was founded in 1982 and is headquartered in West Palm Beach, Florida.

CIQ Business Description:

Huron Consulting Group Inc. provides operational and financial consulting services in the United States. It operates in five segments: Huron Healthcare, Huron Legal, Huron Education and Life Sciences, Huron Business Advisory, and All Other. The Huron Healthcare segment provides consulting services related to hospital or healthcare organization performance improvement, revenue cycle improvement, clinical quality and care variation, labor productivity, non-labor cost management, information technology, patient flow improvement, and physician practice management services for hospitals, integrated health systems, academic medical centers, and physician practices. The Huron Legal segment provides advisory and business services focusing on strategic and management consulting, cost management, and technology and information management, including matter management, records management, document review, and discovery services to assist law departments of corporations and law firms. The Huron Education and Life Sciences segment develops and implements performance improvement, technology, and research enterprise solutions related to financial management, strategy, operational and organizational effectiveness, research administration, and regulatory compliance for higher education, academic medical centers, and pharmaceutical and medical device industries, as well as law firms. The Huron Business Advisory segment offers financial advisory, interim management, operational improvement, capital advisory, and valuation services, as well as assists companies that are in transition, creditors, owners, and investors. The All Other segment is involved in public sector consulting practice, and foreign healthcare and strategic consulting operations in the Middle East. The company was founded in 2002 and is headquartered in Chicago, Illinois.

‎

CIQ Business Description:

ICF International, Inc. provides management, technology, and policy professional services to government and commercial customers in the United States and internationally. The company primarily offers advisory services, which include needs and market assessments, policy analysis, strategy and concept development, organizational assessment and strategy, enterprise architecture, and program design. It also provides implementation services to manage technological, organizational, and management solutions for clients, including information technology solutions, project and program management, project delivery, strategic communications, and training. In addition, the company offers evaluation and improvement services consisting of program evaluations, continuous improvement initiatives, performance management, benchmarking, and return-on-investment analyses. It serves energy, environment, and infrastructure; health, social programs, and consumer/financial; and public safety and defense markets. The company was formerly known as ICF Consulting Group Holdings, LLC and changed its name to ICF International, Inc. in 2006. ICF International, Inc. was founded in 1969 and is headquartered in Fairfax, Virginia.

‎

CIQ Business Description:

Insperity, Inc. provides an array of human resources (HR) and business solutions to help enhance business performance for small and medium-sized businesses. The company provides its HR business offering through its Workforce Optimization solution, which encompasses a range of human resource functions, including payroll and employment administration, employee benefits, workers' compensation, government compliance, performance management, and training and development services. It also offers human capital management, payroll services, time and attendance, performance management, organizational planning, recruiting services, employment screening, financial services, expense management, retirement services, and insurance services through desktop applications and software as a service delivery models. Insperity, Inc. has a strategic alliance with GrowthForce LLC. The company was formerly known as Administaff, Inc. and changed its name to Insperity, Inc. in March 2011. Insperity, Inc. was founded in 1986 and is headquartered in Kingwood, Texas.

‎

CIQ Business Description:

Kelly Services, Inc., together with its subsidiaries, provides workforce solutions to various industries worldwide. The company operates in seven segments: Americas Commercial, Americas Professional and Technical, EMEA Commercial, EMEA Professional and Technical, APAC Commercial, APAC Professional and Technical, and Outsourcing and Consulting Group. It offers trained employees who work in word processing, data entry, and clerical and administrative support roles; staff for contact centers, technical support hotlines, and telemarketing units; instructional and non-instructional employees for schools; support staff for seminars, sales, and trade shows; assemblers, quality control inspectors, and technicians for electronic assembly; maintenance workers, material handlers, and assemblers; and temporary and full-time placement services, as well as direct-hire placement and vendor on-site management services. The company also provides scientific and clinical research workforce solutions; engineering professionals and information technology specialists across various disciplines; creative services, finance and accounting, healthcare, and legal professionals; and talent management solutions to the U.S. federal government. In addition, it offers staffing services for catering and hospitality, industrial, human resources, sales and marketing, procurement, and general management areas. Further, the company provides integrated talent management solutions, including contingent workforce outsourcing, business process outsourcing, recruitment process outsourcing, independent contractor solutions, payroll process outsourcing, career transition and organizational effectiveness, and executive search. Kelly Services, Inc. was founded in 1946 and is headquartered in Troy, Michigan.

CIQ Business Description:

Kforce Inc., together with its subsidiaries, provides professional and technical staffing services and solutions in the United States. It operates through four segments: Technology, Finance and Accounting, Health Information Management, and Government Solutions. The Technology segment offers temporary staffing and permanent placement services focusing on information technology comprising systems/applications programmers and developers, senior-level project managers, systems analysts, enterprise data management, e-business, and networking technicians, as well as healthcare and financial services, and government integrators. The Finance and Accounting segment provides temporary staffing and permanent placement services in the areas of general accounting, business analysis, accounts payable, accounts receivable, financial analysis and reporting, taxation, management consultants, budget preparation and analysis, mortgage and loan processing, cost analysis professional administrative, credit and collections, audit services, and systems and controls analysis and documentation. The Health Information Management segment offers temporary staffing services consisting of acute care facilities, hospitals, physician clinics, software providers, and insurance companies, as well as in the health information technology, the revenue life cycle, and health information management areas. The Government Solutions segment provides technology, and finance and accounting professionals to the federal government; and integrated business solutions in information technology, healthcare informatics, data and knowledge management, research and development, financial management and accounting, and other areas. Kforce Inc. was founded in 1962 and is headquartered in Tampa, Florida.

CIQ Business Description:

ManpowerGroup Inc. provides workforce solutions and services. The company offers permanent, temporary, and contract recruitment services; assessment and selection services; training and development services; outsourcing services related to human resources functions primarily in the areas of large-scale recruiting and workforce-intensive initiatives; and workforce consulting services. It also provides professional resourcing and project-based workforce solutions in the information technology, finance, and engineering fields; talent and career management workforce solutions; and talent based outsourcing services, managed services, recruitment process outsourcing services, borderless talent solutions, and strategic workforce consulting services. The company provides its services through a network of approximately 3,500 offices in 80 countries across various industry sectors, and small and medium-sized enterprises, as well as local, multinational, and global companies. It operates in the Americas, northern Europe, southern Europe, and the Asia Pacific Middle East region. The company was formerly known as Manpower Inc. and changed its name to ManpowerGroup Inc. in March 2011. ManpowerGroup Inc. was founded in 1948 and is headquartered in Milwaukee, Wisconsin.

‎

CIQ Business Description:

Navigant Consulting, Inc., a consulting company, provides dispute, investigative, economic, operational, risk management, and financial and regulatory advisory solutions to companies, legal counsel, and governmental agencies worldwide. The company's Disputes, Investigations & Economics segment provides accounting, financial, and economic analysis; and discovery support, data management, and analytics on a range of legal and business issues, including disputes, investigations, and regulatory matters. This segment serves in-house counsel and law firms, accounting firms, corporate boards, and government agencies. Its Financial, Risk & Compliance segment offers strategic, operational, valuation, risk management, investigative, and compliance consulting to regulated financial services industry, including financial and insurance institutions. This segment also provides anti-corruption solutions, anti-money laundering, and valuation and restructuring consulting to various industries. The company's Healthcare segment offers strategy consulting, revenue cycle management, performance improvement, program management, physician practice management and outsourcing, and technology solutions to health systems, physician practice groups, health insurance providers, governmental agencies, and life sciences companies. Its Energy segment provides management advisory services to existing and prospective owners of energy supply and delivery assets, which enable them to evaluate, plan, develop, and enhance the value of their investments within evolving market and regulatory structures. It also provides energy efficiency and energy related market research services. This segment serves utilities, independent power producers, financial entities, law firms, regulators, and energy equipment providers. Navigant Consulting, Inc. was founded in 1983 and is headquartered in Chicago, Illinois.

‎

CIQ Business Description:

Resources Connection, Inc. provides consulting services. It offers finance and accounting services, such as financial analyses, carve-outs and divestitures, merger and acquisition due diligence, budgeting and forecasting, audit preparation, public-entity reporting, tax-related projects, initial public offering assistance, and assistance in the preparation or restatement of financial statements. The company also offers information management services, which include financial system/enterprise resource planning implementation and post implementation optimization; corporate advisory, strategic communications, and restructuring services; and services in the areas of corporate governance, risk management, internal audit co-sourcing, and compliance. In addition, it offers supply chain management services in the areas of strategic sourcing, contract negotiations and purchasing strategy, and Conflict Minerals compliance; healthcare solutions; actuarial support services for pension and life insurance companies; and human capital services, such as change management, and compensation program design and implementation. Further, the company provides legal and regulatory services, which comprise providing attorneys, paralegals, and contract managers to assist clients with project-based, secondment, or peak period needs. Additionally, it offers policyIQ, a cloud-based governance, risk, and compliance (GRC) software application that enables the focused management of a range of GRC processes, such as risk assessments, Sarbanes compliance, Foreign Corrupt Practices Act, policy and procedure management, internal audit programs, anti-corruption compliance, and Conflict Minerals compliance. The company has operations in North America, Europe, and the Asia Pacific. Resources Connection, Inc. was founded in 1996 and is headquartered in Irvine, California.

‎

CIQ Business Description:

Robert Half International Inc. provides staffing and risk consulting services in North America, South America, Europe, Asia, and Australia. The company operates through three segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services. It offers temporary staffing in the accounting, tax, and finance areas; information technology contract consultants; and senior level project professionals in accounting and finance fields, such as chief financial officers, controllers, and senior financial analysts for financial systems conversions, expansion into new markets, business process reengineering, and post-merger financial consolidation. The company also places temporary and full-time office and administrative personnel ranging from word processors to office managers; full-time accounting, financial, tax, and banking personnel; and full-time employees in the areas, ranging from multiple platform systems integration to end-user support, including specialists in Web development, networking, application development, systems integration, database design, security and business continuity, and desktop support; and temporary and full-time employees in attorney, paralegal, legal administrative, and legal secretarial positions. In addition, it is involved in serving clients in the areas of advertising, marketing, and Web design; placing project consultants in various positions, including creative directors, graphics designers, Web content developers, Web designers, media buyers, and public relations specialists; and the provision of experts specializing in risk, advisory, and transactional services. The company markets its staffing services to clients, as well as to employment candidates. Robert Half International Inc. was founded in 1948 and is headquartered in Menlo Park, California.

CIQ Business Description:

Sykes Enterprises, Incorporated, together with its subsidiaries, provides outsourced customer contact management solutions and services in the business process outsourcing arena. Its customer care services include product information requests, describing product features, activating customer accounts, resolving complaints, cross-selling/up-selling, handling billing inquiries, changing addresses, claims handling, ordering/reservations, prequalification and warranty management, providing health information, and roadside assistance. The company's technical support services comprise handling inquiries regarding hardware, software, communications services, communications equipment, Internet access technology, and Internet portal usage; and customer acquisition services consist of inbound and outbound up-selling of its clients' products and services. It also provides technical staffing services and outsourced corporate help desk services; and fulfillment services, such as order and payment processing, inventory control, product delivery, and product returns handling. The company offers its outsourced customer contact management services through phone, e-mail, social media, text messaging, chat, and digital self-service support. Sykes Enterprises, Incorporated provides its services to companies, medium-sized businesses, and public institutions in the communications, financial services, technology/consumer, transportation and leisure, healthcare, and other industry verticals. It operates in the United States, Canada, Latin America, Australia, the Asia Pacific Rim, Europe, the Middle East, and Africa. Sykes Enterprises, Incorporated was founded in 1977 and is headquartered in Tampa, Florida.

Appendix 3: Manufacturing Comparables' Selection Matrix

Appendix 4: Manufacturing Selected Comparables' Business Description and Financials

CIQ Business Description:

Domtar Corporation designs, manufactures, markets, and distributes various communication papers, specialty and packaging papers, and absorbent hygiene products in the United States, Canada, Europe, Asia, and internationally. It operates in two segments, Pulp and Paper, and Personal Care. The company offers business papers, including copy and electronic imaging papers for use with inkjet and laser printers, photocopiers, and plain-paper fax machines, as well as computer papers, preprinted forms, and digital papers for office and home use. It also provides commercial printing and publishing papers, such as offset papers and opaques for sheet and roll fed offset presses; publishing papers comprising tradebook and lightweight uncoated papers for publishing textbooks, dictionaries, catalogs, magazines, hard cover novels, and financial documents; and base papers that are converted into envelopes, tablets, business forms, and data processing/computer forms. In addition, the company offers papers for thermal and flexible packaging, food and medical packaging, medical gowns and drapes, sandpaper backing, carbonless printing, label, and other coating and laminating applications; and papers for industrial and specialty applications that include carrier and treated papers, security papers, and specialized printing and converting applications. Further, it provides softwood, fluff, and hardwood Kraft products for various end products. Additionally, the company offers absorbent hygiene products, which comprise adult incontinence products under the Attends, IncoPack, Indasec, and Reassure brand; and branded and private label briefs, protective underwear, underpads, pads, and washcloths, as well as baby diapers, youth pants, and infant training pants for healthcare, retail, and direct-to-consumer channels. It serves merchants, retail outlets, stationers, printers, publishers, converters, and end-users. The company was founded in 1848 and is based in Fort Mill, South Carolina.
‎

CIQ Business Description:

Ennis, Inc. designs, manufactures, and sells business forms and other business products in the United States. The company offers snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls, and pressure sensitive products under the Ennis, Royal Business Forms, Block Graphics, Specialized Printed Forms, 360 Custom Labels, ColorWorx, Enfusion, Uncompromised Check Solutions, VersaSeal, Ad Concepts, FormSource Limited, Star Award Ribbon Company, Witt Printing, B&D Litho, Genforms, PrintGraphics, Calibrated Forms, PrintXcel, Printegra, Curtis Business Forms, Falcon Business Forms, Forms Manufacturers, Mutual Graphics, TRI-C Business Forms, Major Business Systems, Independent Printing, Hoosier Data Forms, and Hayes Graphics brand names. It also provides point of purchase advertising for large franchise and fast food chains, as well as kitting and fulfillment under the Adams McClure brand; presentation and document folders under the Admore, Folder Express, and Independent Folders brand names; custom printed labels, custom, and stock tags products under Ennis Tag & Label brand; and custom and stock tags and labels under the Atlas Tag & Label, Kay Toledo Tag, and Special Service Partners brand names. In addition, the company offers custom and imprinted envelopes under the Trade Envelopes, Block Graphics, Wisco, and National Imprint Corporation brand names; and financial and security documents under the Northstar and General Financial Supply brand names. It sells its products directly, as well as through private printers and independent distributors to large banking organizations. The company was formerly known as Ennis Business Forms, Inc. Ennis, Inc. was founded in 1909 and is headquartered in Midlothian, Texas.
‎

CIQ Business Description:

Impreso, Inc. manufactures and distributes various paper and film products for commercial and home use in the United States and internationally. Its products include engineering rolls, wide format ink jet media, desk top ink jet media, computer paper, jumbo laser rolls, laser cut sheets, thermal fax paper, copy paper, POS, add rolls, ribbons, cleaning cards, and laser and inkjet cartridges, as well as labels, tags, and tickets. The company also produces custom private label bottled water; and operates an online web reference directory. It manufactures and distributes its products under the Alliance label, Impreso label, OEM brands, and other private labels. Impreso, Inc. markets its products to dealers and other resellers. The company was founded in 1976 and is headquartered in Coppell, Texas.

‎

CIQ Business Description:

Quad/Graphics, Inc. provides marketing solutions worldwide. The company operates through United States Print and Related Services, and International segments. It offers printing services, such as retail inserts, publications, catalogs, special interest publications, journals, direct mail, books, directories, in-store marketing and promotion, packaging, newspapers, custom print products, and other commercial and specialty printed products; and paper procurement services. The company also provides marketing and other services, including consumer insights, audience targeting, personalization, media planning and placement, process optimization, campaign planning and creation, pre-media production, videography, photography, digital and print execution, and logistics, as well as manufactures ink. It serves various blue chip companies that operate in various industries; and businesses and consumers comprising retailers, publishers, and direct marketers. Quad/Graphics, Inc. was founded in 1971 and is headquartered in Sussex, Wisconsin.
‎

CIQ Business Description:

R.R. Donnelley & Sons Company enables organizations to communicate by creating, managing, producing, distributing, and processing content on behalf of its customers. The company operates through Publishing and Retail Services, Variable Print, Strategic Services, and International segments. Its product offerings primarily consist of magazines, catalogs, retail inserts, commercial and digital print, books, financial print, statement printing, direct mail, labels, office products, packaging, forms, manuals, and other related products. The company's service offerings primarily comprise logistics, EDGAR-related and eXtensible Business Reporting Language financial services, business outsourcing services, and digital and creative solutions. It also offers outsourcing capabilities, including product configuration, customized kitting, and order fulfillment for technology, medical device, and other companies. The company distributes its products to end-users through the United States or foreign postal services, as well as through retail channels, electronically, or by direct shipment to customer facilities. It has operations in Europe, Asia, and North America. R.R. Donnelley & Sons Company was formerly known as CMCo. The company was founded in 1864 and is based in Chicago, Illinois.

‎

CIQ Business Description:

Supremex Inc. manufactures and sells envelopes and related products in North America. It offers custom envelopes, stock envelopes, digital window envelopes, high efficiency envelopes, Extended Envelope, EnviroSafe, self-seal envelopes, and integrated envelopes. The company also provides packaging products, such as Conformer corrugate mailers, Conformer envelopes, auto boxes, tear resistant PaperTyger mailers, courier mailers, Conformer presentation folders, Conformer heavy duty mailers, Conformer paperboard mailers, Conformer lightweight kraft mailers, Enviro-logiX poly mailers, and Enviro-logiX bubble mailers. In addition, it offers custom labels, repositionable labels, and affixing; and products, such as repositionable notes, membership cards, photo packaging, medical and file folders, RFID protective envelopes, and X-ray envelopes. The company sells stock and custom envelopes directly and through a network of distributors to financial institutions, large and small businesses, government organizations, commercial printers, and mailing houses primarily in Western Canada. Supremex Inc. was founded in 1977 and is headquartered in LaSalle, Canada.

‎

CIQ Description:

Transcontinental Inc. engages in print, flexible packaging, publishing, and digital media operations in Canada and the United States. The company operates through Printing and Packaging Sector, and Media Sector segments. The Printing and Packaging Sector segment prints retail flyers, magazines, newspapers, color books, and personalized and mass marketing products; provides pre-media and geo-targeted door-to-door distribution services; and produces and sells flexible packaging solutions. The Media Sector segment is involved in printing and digital publishing of newspapers, educational books, specialized publications for professionals, and retail promotional content in French and English. The company also provides strategic consulting services, such as integrated strategy, strategic planning, and social media strategy; creative development, photography, copywriting, video, and other content-related services; and search engine marketing and specialized sites services, as well as plans events, conferences, and seminars. Transcontinental Inc. was founded in 1976 and is headquartered in Montreal, Canada.

‎

Appendix 5: Marketing Services Comparables' Selection Matrix

‎

Appendix 6: Marketing Services Selected Comparables' Business Descriptions and Financials

CIQ Business Description:

Advantex Marketing International Inc. operates in the marketing services industry. The company develops and manages merchant-based loyalty programs for financial institutions and other organizations through which their customers earn flyer miles or points on purchases at participating merchants. Its programs and services include the Advance Purchase Marketing program that purchases several months of future transaction credits on behalf of its customers from selected merchants at a discount, and markets the merchants together with special cardholder incentives through the CIBC Bonus Rewards program; the Canadian Imperial Bank of Commerce (CIBC) Bonus Rewards program, which is an integrated feature of CIBC credit cards that offers cardholders with bonus rewards and other card-specific bonuses on their purchases at various establishments in Canada; and the Aeroplan Fashion program to earn Aeroplan Miles when customers shop for clothing, footwear, jewelry, and fashion accessories. As of October 26, 2016, the company had partnerships with approximately 1,300 merchants in Canada and the United States. Its merchant partners operate in various business segments, including restaurants; golf courses; independent inns, resorts, and selected hotels; spas; retailers of men's and ladies fashion, footwear, and accessories; retailers of sporting goods; florists and garden centers; book and newspaper stores; health and beauty centers; dry cleaners; gift stores; home decor; automotive dealers and service centers; and tire dealerships. Advantex Marketing International Inc. was founded in 1994 and is headquartered in Markham, Canada.

‎

CIQ Business Description:

Affinion Group Holdings, Inc. engages in designing, marketing, and servicing customer engagement and loyalty solutions worldwide. The company partners with various companies to develop and market programs that offer a range of services to their end-customers. Its customer engagement and loyalty solutions include the development of customized and relevant products and services that address fundamental consumer needs and fulfill the expectations consumers have of the services and offers they expect to receive from its marketing partners; marketing strategy and management of customized marketing programs; and data analysis utilizing its proprietary technology and databases to target customers. The company's customer engagement and loyalty solutions also comprise the design and implementation of marketing campaigns in various types of media, including direct mail, online marketing, point-of-sale marketing, direct response television marketing, Internet, inbound and outbound telephony, and voice response unit marketing; fulfillment, customer service, Website, and mobile application development; loyalty program design and administration; and disaggregated loyalty redemption options, such as gift cards, cash back, travel, and merchandise. It also provides discount travel services, credit monitoring and identity-theft resolution, accidental death and dismemberment insurance, roadside assistance, various checking accounts, and credit card enhancement services, as well as other products and services. The company provides its products and services through retail and wholesale arrangements. Affinion Group Holdings, Inc. was founded in 1973 and is headquartered in Stamford, Connecticut.

CIQ Business Description:

Alliance Data Systems Corporation provides marketing and loyalty solutions in the United States and internationally. It facilitates and manages interactions between its clients and their customers through consumer marketing channels, including in-store, online, email, social media, mobile, direct mail, and telephone. The company operates in three segments: LoyaltyOne, Epsilon, and Card Services. The LoyaltyOne segment owns and operates the AIR MILES Reward Program and BrandLoyalty program that are coalition and short-term loyalty programs. This segment also offers loyalty consulting, customer analytics, creative services, and mobile solutions. The Epsilon segment provides direct marketing solutions that leverage transactional data to help clients acquire and build relationships with their customers. Its services include strategic consulting, customer database technologies, omnichannel marketing, loyalty management, proprietary data, predictive modeling, permission-based email marketing, personalized digital marketing, and direct and digital agency services. This segment's marketing services comprise agency, marketing technology, data, strategy and analytical, and traditional and digital marketing. The Card Services segment offers credit card processing, billing and payment processing, customer care, and collections services for private label retailers, as well as private label retail credit card and loan receivables financing, including securitization of the credit card receivables that it underwrites from its private label and co-brand retail credit card programs. This segment also designs and implements strategies that help its clients in acquiring, retaining, and managing repeat customers. It serves financial services, specialty retail, grocery and drugstore chains, petroleum retail, automotive, hospitality and travel, telecommunications, insurance, and healthcare markets. The company was founded in 1996 and is headquartered in Plano, Texas.

‎

CIQ Business Description:

Fluent, Inc. provides data-driven digital marketing services primarily in the United States. The company also offers customer acquisition services by operating digital marketing campaigns, through which the company connects its advertiser clients with consumers. It delivers data and performance-based marketing executions to approximately 500 consumer brands, direct marketers, and agencies across a range of industries, including financial services, retail and consumer, media and entertainment, staffing and recruitment, and marketing services. The company was formerly known as Cogint, Inc. and changed its name to Fluent, Inc. in April 2018. Fluent, Inc. is headquartered in New York, New York.
‎

CIQ Business Description:

Harte Hanks, Inc. provides various multichannel marketing services in the United States and internationally. The company operates in two segments, Customer Interaction and Trillium Software. The Customer Interaction segment provides agency and digital services, including search engine management, display, digital analytics, Website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management services; database marketing solutions and business-to-business lead generations that offer insight and analytics, customer data integration, and marketing communications tools. This segment offers direct marketing services, including digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking, commingling, shrink wrapping, and specialized mailing services, as well as custom kitting, print on demand, product recalls, and freight optimization services through its fulfillment centers; and operates teleservice workstations that offer contact center solutions comprising speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and Web self-services. The Trillium Software segment offers data quality solutions comprising data profiling, data cleansing, enrichment, and data linking for e-business, Big Data customer relationship management, data governance, enterprise resource planning, supply chain management, data warehouse, and other enterprise applications. It serves retail, technology, financial services, automotive and consumer brands, and pharmaceutical/healthcare vertical markets. Harte Hanks, Inc. was founded in 1970 and is based in San Antonio, Texas.

CIQ Business Description:

Points International Ltd. provides e-commerce and technology services to loyalty program operators in the United States, Europe, Canada, and internationally. It provides various white label or private branded ecommerce services, including online sale of loyalty currency direct to program members in order for the members to top-up their accounts to reach a redemption threshold or as a gift for friends and family members; and the online transfer of pre-existing loyalty currency from one member into another member's account, primarily a family member or friend, as another means of enabling that other member to accumulate sufficient miles or points to reach a redemption threshold. It also operates Points Loyalty Wallet, a set of platform capabilities accessible through application program interfaces that enable loyalty programs, merchants, and other businesses to embed balance tracking and loyalty commerce transactions into their product offerings and allow users to track, manage, and access multiple loyalty rewards programs. In addition, the company operates PointsHound.com that allows loyalty program members to earn loyalty points for staying in their favorite hotels and also to earn bonus rewards in the form of airline miles; and Points Travel, an e-commerce platform that helps loyalty programs enhance their revenues from hotel sales. The company was incorporated in 1999 and is headquartered in Toronto, Canada.

Appendix 7: Sales – Wholesale/Direct Marketing Comparables' Selection Matrix

‎

Appendix 8: Sales – Wholesale/Direct Marketing Selected Comparables' Business Description and Financials

CIQ Business Description:

ADDvantage Technologies Group, Inc., through its subsidiaries, distributes and services electronics and hardware for the cable television and telecommunication industries in the United States, Canada, Central America, Asia, Europe, Mexico, South America, and internationally. The company operates through two segments, Cable Television and Telecommunications. The Cable Television segment provides products for video, telephone, and Internet data signals. It offers headend products, such as satellite receivers, integrated receivers/decoders, demodulators, modulators, antennas and antenna mounts, amplifiers, equalizers, and processors; fiber products that include optical transmitters, fiber optic cables, receivers, splitters, and compatible accessories; and access and transport products, such as line extenders, broadband amplifiers, and directional taps. In addition, this segment offers test equipment; hardware equipment that include connectors and cable products; and repair services. The Telecommunications segment provides telecommunication equipment, such as spares and replace non-working components; and customer premise equipment to the reseller community, telecommunications companies, and enterprise companies. This segment offers central office equipment that include optical transport, switching, and data center equipment for communication networks; customer premise equipment, such as integrated access devices, channel banks, Internet protocol private branch exchange phones, and routers; and decommissioning services for surplus and obsolete telecom equipment. The company was formerly known as ADDvantage Media Group, Inc. and changed its name to ADDvantage Technologies Group, Inc. in December 1999. ADDvantage Technologies Group, Inc. was founded in 1989 and is headquartered in Broken Arrow, Oklahoma.

‎

CIQ Business Description:

Applied Industrial Technologies, Inc. distributes industrial products in North America, Australia, New Zealand, and Singapore. The company offers its products for maintenance, repair, and operational, as well as original equipment manufacturing customers. It operates in two segments, Service Center Based Distribution, and Fluid Power and Flow Control. The company distributes bearings, power transmission products, engineered fluid power components and systems, specialty flow control solutions, industrial rubber products, linear motion components, tools, safety products, oilfield supplies, and other industrial and maintenance supplies; and hydraulic, pneumatic, lubrication, filtration, and flow control components and systems. It also operates fabricated rubber shops that modify and repair conveyor belts, as well as provide hose assemblies; and rubber service field crews to install and repair conveyor belts and rubber lining at customer locations. In addition, the company rebuilds or assembles speed reducers, pumps, valves, cylinders, and electric and hydraulic motors, as well as custom machining products; and offers flow control and technical support services. It offers industrial products through a network of service centers. The company serves various industries, including agriculture and food processing, cement, chemicals and petrochemicals, fabricated metals, forest products, industrial machinery and equipment, mining, oil and gas, primary metals, transportation, and utilities, as well as to government entities. Applied Industrial Technologies, Inc. was founded in 1923 and is headquartered in Cleveland, Ohio.

‎

CIQ Business Description:

EACO Corporation, through its wholly-owned subsidiary, Bisco Industries, Inc., distributes and sells electronic components and fasteners primarily in the United States and Canada. It offers electronic components, including spacers and standoffs, card guides and ejectors, component holders and fuses, circuit board connectors, and cable components, as well as various fasteners and hardware products. The company supplies parts used in the manufacture of products in a range of industries, including aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment, and marine. It also provides customized services and solutions for various production needs comprising special packaging, bin stocking, kitting and assembly, bar coding, electronic requisitioning, integrated supply programs, and others. The company sells its products primarily to the original equipment manufacturers through its sales representatives and distribution centers; and through its Website. EACO Corporation was founded in 1973 and is headquartered in Anaheim, California.

‎

CIQ Business Description:

HD Supply Holdings, Inc. operates as an industrial distributor in North America. It operates through two segments, Facilities Maintenance, and Construction & Industrial. The Facilities Maintenance segment offers electrical and lighting items, plumbing supplies, appliances, janitorial supplies, hardware products, kitchen and bath cabinets, window coverings, textiles and guest amenities, healthcare maintenance products, and water and wastewater treatment products, as well as heating, ventilating, and air conditioning products. The Construction & Industrial segment provides tilt-up brace systems, forming and shoring systems, concrete chemicals, hand and power tools, cutting tools, rebars, ladders, safety and fall arrest equipment, specialty screws and fasteners, sealants and adhesives, drainage pipes, geo-synthetics, erosion and sediment control equipment, and other engineered materials used in non-residential and residential construction. This segment also offers home improvement solutions, such as light remodeling and construction supplies, kitchen and bath cabinets, windows, plumbing materials, electrical equipment, and other products primarily to small remodeling contractors and trade professionals through local retail outlets. In addition, it provides pre-bid assistance, product submittals, engineering, and tool repair services. The company serves contractors, maintenance professionals, home builders, industrial businesses, and government entities through a network of branches and professional sales force, as well as through print catalogs and e-commerce. The company was formerly known as HDS Investment Holding, Inc. and changed its name to HD Supply Holdings, Inc. in April 2013. HD Supply Holdings, Inc. was founded in 2007 and is headquartered in Atlanta, Georgia.

CIQ Business Description:

Houston Wire & Cable Company, through its subsidiaries, sells electrical and mechanical wire and cable, industrial fasteners, hardware, and related services in the United States. It offers wire and cable products, including continuous and interlocked armor cables; control and power cables; electronic wires and cables; flexible and portable cords; instrumentation and thermocouple cables; lead and high temperature cables; medium voltage cables; and premise and category wires and cables, primary and secondary aluminum distribution cables, and steel wire ropes and wire rope slings, as well as synthetic fiber rope slings, chains, shackles, and other related hardware and corrosion resistant products. The company also provides private branded products comprising its proprietary brand LifeGuard, a low-smoke zero-halogen cable. Its products are used in maintenance, repair, and operations activities, and related projects; larger-scale projects in the utility, industrial, and infrastructure markets; and a range of industrial applications, such as communications, energy, engineering and construction, general manufacturing, marine construction and marine transportation, mining, infrastructure, oilfield services, petrochemical, transportation, utility, wastewater treatment, and food and beverage. Houston Wire & Cable Company was founded in 1975 and is based in Houston, Texas.

‎

CIQ Business Description:

InnerWorkings, Inc. provides marketing execution solutions in North America, Latin America, Europe, the Middle East, and Africa. The company's proprietary software applications and databases create an integrated solution that stores, analyzes, and tracks the production capabilities of the supplier network, as well as detailed pricing data. It offers outsourced print management solutions that encompass the design, sourcing, and delivery of printed marketing materials, including direct mail, in-store signage, and marketing collateral; and outsourced solutions for the design, sourcing, and delivery of branded merchandise and product packaging. The company also assists clients with the management of events, promotions spending, and related procurement needs; and designs, sources, and installs point of sale displays, permanent retail fixtures, and overall store design, as well as offers on-site outsourced creative studio services and on-demand creative services. In addition, it provides fulfillment and logistics services, such as kitting and assembly, inventory management, and pre-sorting postage. Further, the company offers creative services comprising copywriting, graphics and Website design, identity work and marketing collateral development, and image and print-ready page processing and proofing capability services. It serves corporate clients in a range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, food and beverage, broadcasting and cable, and transportation. The company was founded in 2001 and is headquartered in Chicago, Illinois.

‎

CIQ Business Description:

Lawson Products, Inc. distributes products and services to the industrial, commercial, institutional, and government maintenance, repair, and operations marketplace in the United States, Puerto Rico, Canada, Mexico, and the Caribbean. It operates in two segments, Lawson and Bolt. The company’s products include fastening systems, fluid power products, specialty chemicals, cutting tools and abrasives, electrical products, aftermarket automotive supplies, safety products, welding and metal repair products, and other products. It serves customers operating in the automotive repair, commercial vehicle maintenance, government, manufacturing, food processing, distribution, construction, oil and gas, mining, wholesale, service, and other industries. The company sells its products through sales representatives, as well as directly from its Website or through fax or phone. Lawson Products, Inc. was founded in 1952 and is headquartered in Chicago, Illinois.

‎

CIQ Business Description:

MRC Global Inc., through its subsidiaries, distributes pipes, valves, fittings, and other infrastructure products and services to the energy industry in the United States, Canada, and internationally. The company supplies products across various markets, such as upstream, midstream, and downstream. It offers ball, butterfly, gate, globe, check, diaphragm, needle, and plug valves; and other products, such as lined corrosion resistant piping systems, control valves, valve automation products, and top work components, as well as measurement, steam, and instrumentation products. The company also provides carbon steel fittings and flanges, including carbon weld fittings, flanges, and piping components; stainless, alloy, and corrosion resistant pipes, tubing, fittings, and flanges; and carbon line pipes. In addition, it offers natural gas distribution products comprising risers, meters, polyethylene pipes and fittings, and various other components and industrial supplies; oilfield and industrial supplies and completion equipment consisting of high density polyethylene pipes, fittings, and rods; and specialized production equipment comprising tanks and separators. Further, the company provides various services, such as product testing, manufacturer assessments, multiple daily deliveries, volume purchasing, inventory and zone store management and warehousing, technical support, training, just-in-time delivery, truck stocking, order consolidation, product tagging, and system interfaces. Its products are used in the construction, maintenance, repair, and overhaul of equipment used in extreme operating conditions, including high pressure, high/low temperature, and high corrosive and abrasive environments. The company was formerly known as McJunkin Red Man Holding Corporation and changed its name to MRC Global Inc. in January 2012. MRC Global Inc. was founded in 1921 and is headquartered in Houston, Texas.

‎

CIQ Business Description:

MSC Industrial Direct Co., Inc., together with its subsidiaries, distributes metalworking and maintenance, repair, and operations (MRO) products in the United States, Canada, and the United Kingdom. The company’s MRO products comprise cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock products, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components, and electrical supplies. It offers approximately 1,645,000 stock-keeping units through its catalogs; brochures; e-commerce channels, including its Website, mscdirect.com; inventory management solutions; and call-centers and branches. The company serves through its distribution network of 100 branch offices and 12 customer fulfillment centers. It serves individual machine shops, Fortune 100 manufacturing companies, and government agencies. The company was founded in 1941 and is headquartered in Melville, New York.

‎

CIQ Business Description:

ScanSource, Inc. operates as a wholesale distributor of specialty technology products in North America and internationally. It operates in two segments, Worldwide Barcode & Security and Worldwide Communications & Services. The Worldwide Barcode & Security segment focuses on automatic identification and data capture (AIDC), point-of-sale (POS), networking, and electronic physical security technologies. Its AIDC and POS products are used to automate the collection, processing, and communication of information for commercial and industrial applications, such as retail sales, distribution, shipping, inventory control, materials handling, warehouse management, and health care applications; electronic physical security products, including identification, access control, video surveillance, intrusion-related, wireless, and networking infrastructure products; and 3D printing solutions to replace and complement traditional methods, as well as reduce the time and cost of designing new products. The Worldwide Communications & Services segment focuses on communications technologies and services. It provides voice and data products, such as private branch exchanges (PBX), key systems, and telephone handsets and components that are used in voice, fax, data, voice recognition, call center management, and IP communication applications; converged communication products, such as telephone and IP network interfaces, voice over Internet protocol systems, PBX integration products, and carrier-class board systems-level products; and video products comprising video and voice conferencing, and network systems. This segment also offers data networking products that include switches, servers, and routers; and provides value-added support programs and services, such as education and training, customer configuration, marketing services, network assessments, WiFi services, and partnership programs. ScanSource, Inc. was founded in 1992 and is headquartered in Greenville, South Carolina

‎

CIQ Business Description:

SiteOne Landscape Supply, Inc. engages in the wholesale distribution of landscape supplies in the United States and Canada. The company provides a selection of approximately 120,000 stock keeping units, including irrigation supplies, fertilizer and control products, landscape accessories, nursery goods, outdoor lightings, and ice melt products, as well as hardscapes, such as pavers, natural stones, and blocks. It also offers consultative services, which include assistance with irrigation network design, commercial project planning, generation of sales leads, marketing services and product support, and a series of technical and business management seminars; and distributes branded products of third parties. The company markets its products primarily to residential and commercial landscape professionals who specialize in the design, installation, and maintenance of lawns, gardens, golf courses, and other outdoor spaces through branch network and direct distribution. SiteOne Landscape Supply, Inc. is headquartered in Roswell, Georgia.
‎

CIQ Business Description:

SPAR Group, Inc., together with its subsidiaries, provides merchandising and marketing services worldwide. The company’s syndicated services include product reordering and replenishment; ensuring its products for distribution; adding new products; implementing store planogram schematics; setting product category shelves; ensuring that product shelf tags are in place; checking for salability of the clients’ products; placing new product and promotional items in prominent positions; and kiosk replenishment and maintenance services for retailers, manufacturers, and distributors. Its dedicated services consist of syndicated services, as well as new store set-up, store remodel, and fixture installation services for a specific retailer or manufacturer. In addition, the company’s project services comprise specific in-store services initiated by retailers and manufacturers, such as new store openings, new product launches, special seasonal or promotional merchandising, focused product support, product recalls, and in-store product demonstration and sampling, as well as performs kiosk product replenishment, inventory control, new store sets and existing store resets, re-merchandising, remodels and category implementation, and under annual or stand-alone project contracts or agreements. Further, it assembles furniture, grills, and various other products in stores, homes, and offices; and offers in-store event staffing, retail compliance and price audit, mystery shopping, and data collection services. The company serves mass merchandisers; pharmacies; drug, grocery, office supply, dollar, convenience, specialty, electronic, and home improvement stores; and other retail outlets, including discount stores, in-home and in-office, etc. SPAR Group, Inc. was founded in 1967 and is headquartered in White Plains, New York.

‎

CIQ Business Description:

Surge Components, Inc. supplies electronic products and components in the United States. The company offers capacitors, which are electrical energy storage devices; and discrete components, such as semiconductor rectifiers, transistors, diodes, and circuit protection devices, as well as audible components, including audible transducers, buzzers, speakers, microphones, resonators, alarms, chimes, filters, and discriminators, as well as fuses, printed circuit boards, and switches. These products are used in the electronic circuitry of various products, including automobiles, telecomm, audio, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies, and security equipment. The company sells its products to original equipment manufacturers and distributors through independent sales representatives or organizations in the United States, Canada, China and other Asian countries, South America, and Europe. Surge Components, Inc. was founded in 1981 and is headquartered in Deer Park, New York .

‎

CIQ Business Description:

Tech Data Corporation engages in the wholesale distribution of technology products. It distributes and markets broadline products, such as notebooks, tablets, desktop systems, printers, supplies, and components; and data center products, including servers, proprietary servers, networking, and storage products. The company also offers software products, such as virtualization, cloud, security, desktop application, operating system, and utilities software; mobility products consisting of mobile phones and accessories; and consumer electronics comprising TV's, digital displays, consumer audio-visual devices, and network-attached consumer devices. In addition, it offers a range of customer services, such as training and technical support, customized shipping documents, product configuration/integration, and access to flexible financing programs; and a suite of electronic commerce tools. The company serves value-added resellers, direct marketers, retailers, and corporate resellers. Tech Data Corporation sells its products to customers in approximately 100 countries in North America, South America, Europe, the Middle East, and Africa. The company was founded in 1974 and is headquartered in Clearwater, Florida.

‎

CIQ Business Description:

Uni-Select Inc. distributes automotive refinish, and industrial paint and related products in the United States, Canada, and the United Kingdom. It operates through FinishMaster US, Canadian Automotive Group, and The Parts Alliance UK segments. The company also distributes automotive original equipment manufacturer and aftermarket parts. The company was founded in 1968 and is based in Boucherville, Canada.

‎

CIQ Business Description:

Veritiv Corporation operates as a business-to-business distributor of print, publishing, packaging, and facility solutions in the United States, Canada, and Mexico. The company operates through four segments: Print, Publishing, Packaging, and Facility Solutions. The Print segment sells and distributes commercial printing, writing, copying, digital, wide format, and specialty paper products; and graphics consumables and graphics equipment. This segment also offers customized paper conversion services of commercial printing paper for distribution to document centers and form printers. The Publishing segment sells and distributes coated and uncoated commercial printing papers to publishers, retailers, converters, printers, and specialty businesses for use in magazines, catalogs, books, directories, gaming, couponing, retail inserts, and direct mail. This segment also provides print management, procurement, and supply chain management solutions. The Packaging segment provides standard and custom packaging solutions. The Facility Solutions segment sources and sells cleaning, break-room, and other supplies, such as towels, tissues, wipers and dispensers, can liners, commercial cleaning chemicals, soaps and sanitizers, sanitary maintenance supplies and equipment, safety and hazard supplies, and shampoos and amenities. In addition, it offers logistics and supply chain management solutions. The company offers its products under the Endurance, uBrand, nordic+, Econosource, Comet, Starbrite Opaque Select, porcelianECO 30, TUFflex, Reliable, and Spring Grove brands, as well as other brands. It operates approximately 180 distribution centers. The company's customers include printers, publishers, data centers, manufacturers, higher education institutions, healthcare facilities, sporting and performance arenas, retail stores, government agencies, property managers, and building service contractors. Veritiv Corporation was incorporated in 2013 is headquartered in Atlanta, Georgia.

‎

Appendix 9: Sales – Retail/Direct to Business Comparables' Selection Matrix

‎

Appendix 10: Sales – Retail/Direct to Business Selected Comparables' Business Description and Financials

CIQ Business Description:

Amazon.com, Inc. engages in the retail sale of consumer products in North America and internationally. It operates through the North America, International, and Amazon Web Services (AWS) segments. The company sells merchandise and content purchased for resale from vendors, as well as those offered by third-party sellers through retail Websites, such as amazon.com, amazon.ca, amazon.com.mx, amazon.com.au, amazon.com.br, amazon.cn, amazon.fr, amazon.de, amazon.in, amazon.it, amazon.co.jp, amazon.nl, amazon.es, and amazon.co.uk. It also manufactures and sells electronic devices, including kindle e-readers, fire tablets, fire TVs, and echo, as well as fire phones; and provides Kindle Direct Publishing, an online platform that allows independent authors and publishers to make their books available in the Kindle Store. In addition, the company offers programs that enable sellers to sell their products on its Websites, as well as their own branded Websites; and programs that allow authors, musicians, filmmakers, app developers, and others to publish and sell content. Further, it offers compute, storage, database, and other AWS services, as well as fulfillment, publishing, digital content subscriptions, advertising, and co-branded credit card agreements services. Additionally, the company offers Amazon Prime, an annual membership program, which provides free shipping of various items; access to unlimited streaming of movies and TV episodes; and other services. It serves consumers, sellers, developers, enterprises, and content creators. The company was founded in 1994 and is headquartered in Seattle, Washington.

‎

CIQ Business Description:

Bluestem Group Inc., through its subsidiaries, offers a selection of name-brand, private label, and non-branded merchandise through Internet Websites and catalog serving low to middle income consumers in the United States. It operates through Northstar Portfolio and Orchard Portfolio segments. The Northstar Portfolio segment consists of Fingerhut and Gettington retail brands. This segment offers consumer electronics, domestics, housewares, and home furnishings. The Orchard Portfolio segment comprises of Tog Shop and WinterSilks retail brands. This segment provides apparel, accessories, and home products for women and men through various platforms, including online and direct mail. Bluestem Group Inc. also offers bed and bath, lawn and garden, and hardware products; video games, toys, and sporting goods; and footwear, cosmetics, fragrances, and jewelry products. The company was formerly known as Capmark Financial Group Inc. and changed its name to Bluestem Group Inc. in June 2015. Bluestem Group Inc. was incorporated in 1998 and is headquartered in Eden Prairie, Minnesota.

‎

CIQ Business Description:

Indigo Books & Music Inc. operates as a book, gift, and specialty toy retailer in Canada. The company also offers kids, toy, baby, home, fashion, paper, and electronics products. As of March 31, 2018, it operated 86 superstores and 123 small format stores under the Indigo, Chapters, Coles, Indigospirit, and The Book Company names. It also sells its products through indigo.ca Website; and mobile applications. In addition, the company sells calendars, games, and gifts in approximately 200 seasonal kiosks and year-round stores in shopping malls. Indigo Books & Music Inc. was founded in 1940 and is headquartered in Toronto, Canada.

‎

CIQ Business Description:

Office Depot, Inc., together with its subsidiaries, supplies office products and services. It operates in three segments: North American Retail, North American Business Solutions, and International. The company sells office supplies, technology products and solutions, business machines and related supplies, facilities products, and office furniture. It also offers copy and print services. The company sells its products and services to consumers and businesses through office supply stores, a contract sales force, Internet sites, an outbound telephone account management sales force, direct marketing catalogs, and call centers, as well as participates under licensing and merchandise arrangements in Latin America, Europe, Israel, and Japan. As of December 26, 2015, it operated 1,564 stores in the United States, including Puerto Rico and the U.S. Virgin Islands; and 147 stores in France, South Korea, Sweden, New Zealand, and Australia. The company offers its products under various labels, including Office Depot, OfficeMax, Foray, Ativa, TUL, Realspace, WorkPro, Brenton Studio, Highmark, Grand & Toy, and Viking Office Products. Office Depot, Inc. was founded in 1986 and is headquartered in Boca Raton, Florida.

‎

CIQ Business Description:

PC Connection, Inc. provides a range of information technology (IT) solutions. The company operates through three segments: SMB, Large Account, and Public Sector. It offers IT products, such as computer systems, software and peripheral equipment, networking communications, and other products and accessories. The company also provides services comprising design, configuration, and implementation of IT solutions. It markets its products and services through its Websites, such as pcconnection.com, moredirect.com, govconnection.com, and macconnection.com. The company also publishes various catalogs, including PC Connection focusing on PCs and compatible products; and MacConnection focusing on Apple personal computers and compatible products. In addition, it issues specialty catalogs, such as GovConnection catalogs directed to government and educational institutions; and Connection Magazine directed to mid-market, enterprise, and healthcare customers. PC Connection, Inc. serves small to medium-sized businesses (SMBs) comprising small office/home offices customers; government and educational institutions; and medium-to-large corporate accounts. The company was founded in 1982 and is headquartered in Merrimack, New Hampshire.

‎

CIQ Business Description:

PCM, Inc. operates as a multi-vendor provider of technology products and solutions, and other consumer products to commercial businesses; state, local, and federal governments; and educational institutions primarily in the United States and Canada. The company operates through four segments: Commercial, Public Sector, MacMall, and Canada. It primarily sells device products, servers, storage products, networks, printers, and related accessories and devices. The company also provides value-added services, such as custom configured systems, software licensing asset management, image management, product asset tagging, and asset disposal services, as well as software value-added reseller services, managed services, cloud-based services, consulting, and IT management and related services. PCM, Inc. markets its products, services, and solutions through its sales force, field and internal service teams, direct marketing channels, and data centers. The company was formerly known as PC Mall, Inc. and changed its name to PCM, Inc. in December 2012. PCM, Inc. was founded in 1987 and is headquartered in El Segundo, California.

‎

CIQ Business Description:

School Specialty, Inc., together with its subsidiaries, distributes supplies, furniture, technology products, supplemental learning products, and curriculum solutions to the education marketplace in the United States and Canada. The company’s Distribution segment offers office products, classroom supplies, janitorial and sanitation supplies, school equipment, planning and development products, physical education products, art supplies and paper, and others; supplemental learning materials, teaching resources, special needs and education products, early childhood offerings, classroom technology, planning and student development, and school health and furniture; and project management and design services for school refurbishment and new construction projects. This segment provides its products primarily under the Childcraft, Sax Arts & Crafts, Califone, Premier Agendas, Classroom Select, Sportime, Abilitations, Hammond & Stephens, SPARK, Brodhead Garrett, School Smart, Royal Seating, and Projects by Design brands. Its Curriculum segment develops standards-based curriculum products, supplemental and intervention curriculum materials, instructional programs, and student assessment tools in the areas of science, math, and reading and math intervention, as well as comprehension, vocabulary, spelling, and grammar. This segment sells its products to teachers, curriculum specialists, and other educators under various product lines, such as Delta Education, FOSS, CPO Science, Frey Scientific, Educator’s Publishing Service, Academy of Reading, Academy of Math, Wordly Wise 3000, Explode the Code, ThinkMath!, Making Connections, and S.P.I.R.E. The company offers its products through its sales force, catalogs, and its proprietary e-commerce Websites. School Specialty, Inc. was founded in 1959 and is headquartered in Greenville, Wisconsin.
‎

CIQ Business Description:

Stamps.com Inc. provides Internet-based postage solutions in the United States. It offers solutions for mailing and shipping various mail pieces, such as postcards, envelopes, flats, and packages using a range of United States Postal Service (USPS) mail classes, including First Class Mail, Priority Mail, Priority Mail Express, Media Mail, Parcel Select, and others. The company's products and services comprise USPS approved PC Postage service that enables users to print electronic stamps directly onto envelopes, plain paper, or labels using personal computer, printer, and Internet connection. It also provides multi carrier shipping solutions under the ShipStation and ShipWorks brands; mailing and shipping integration solutions comprising electronic postage for transactions to partners who manage the front-end process; sells NetStamps labels, DYMO Stamp labels, shipping labels, other mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies through its mailing and shipping supplies store; and Stamps.com branded insurance to insure mails or packages. In addition, the company offers PhotoStamps, a patented form of postage service, which allows consumers to turn digital photos, designs, or images into USPS-approved postages. It serves individuals, small businesses, home offices, medium-size businesses, and large enterprises. The company was formerly known as StampMaster, Inc. and changed its name to Stamps.com Inc. in December 1998. Stamps.com Inc. was founded in 1996 and is headquartered in El Segundo, California.

‎

CIQ Business Description:

Systemax Inc. operates as a direct marketer of brand name and private label products. Its Industrial Products Group segment sells a range of maintenance, repair, and operation products, including electrical and bulbs; fasteners and hardware; foodservice and appliances; furniture and office products; HVAC/R fans; janitorial and maintenance; material handling; medical and laboratory equipment; metalworking and cutting tools; motors and power transmission products; office and school supplies; outdoor and grounds maintenance products; packaging and supplies; plumbing supplies; pneumatics and hydraulics; raw materials and building supplies; safety and security products; storage and shelving products; tools and instruments; and vehicle maintenance, and workbench and shop desks in North America. The company's EMEA Technology Products Group segment sells information and communication technology products, such as computers and mobile devices; computer parts and memory products; servers, and storage and backup products; computer components and accessories; networking and security products; software products; and electronics, and commercial and home networking products. This segment also offers consumer electronics comprising TV and video, audio, and GPS products; cameras and surveillance products; cell phones; video games and toys; and home and electronics accessories. The company offers its products to for-profit businesses, educational organizations, and government entities through its relationship marketers, catalog mailings, and proprietary Internet Websites. Systemax Inc. was founded in 1949 and is headquartered in Port Washington, New York.
‎

Appendix 11: IT Services Comparables' Selection Matrix

‎

Appendix 12: IT Services Selected Comparables' Business Description

CIQ Business Description:

Cognizant Technology Solutions Corporation provides information technology (IT), consulting, and business process services worldwide. The company operates through four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. Its consulting and technology services include IT strategy consulting, program management consulting, operations improvement consulting, strategy consulting, and business consulting services; and application design and development, systems integration, enterprise resource planning, and customer relationship management implementation services. The company also offers enterprise information management services, such as strategic, advisory, and management consulting; enterprise data management; descriptive analytics/business intelligence; strategic corporate performance management; and packaged analytics services, as well as big data services that assist clients in managing and deriving actionable insights. In addition, it provides application testing services; and develops, licenses, implements, and supports proprietary and third-party software products, as well as offers digital technologies services. Further, the company offers outsourcing services, such as application maintenance services; IT infrastructure services; and business process services, including clinical data management, pharmacovigilance, equity research support, commercial operations, and order management. It serves various industries, including banking and insurance; healthcare and life sciences; manufacturing and logistics; retail, travel, and hospitality; consumer goods; communications; information, media, and entertainment; and technology. The company markets and sells services through its professional staff, senior management, and direct sales personnel. Cognizant Technology Solutions Corporation was founded in 1998 and is headquartered in Teaneck, New Jersey.

‎

CIQ Business Description:

Genpact Limited provides business process outsourcing and information technology (IT) management services worldwide. The company offers finance and accounting services that include accounts payable services comprising document management, invoice processing, approval, and resolution management solutions; order to cash services, such as customer master data management, credit and contract management, fulfillment, billing, collections, and dispute management services; record to report services consisting of closing and reporting, treasury, tax, financial planning and analysis, and product cost accounting services; and enterprise risk and compliance services comprising risk, SOX advisory, enterprise risk management, internal audits, FCPA, and IT risk management services. It also provides analytics and research services; core industry operation services; business consulting and enterprise risk consulting services; transformation services; and supply chain and procurement services, including direct and indirect strategic sourcing, category management, spend analytics, procurement operations, master data management, and other procurement and supply chain advisory services. In addition, the company offers enterprise application services comprising business intelligence and data services, enterprise resource planning, quality assurance, and technology integration solutions; IT infrastructure management services, including end user computing, infrastructure management services, application production support, and database management services; and collections and customer services in the areas of consumer banking, business-to-business finance, and mortgage servicing. It serves banking and financial services, insurance, capital markets, consumer product goods, life sciences, infrastructure, manufacturing and services, healthcare, and high-tech industries. Genpact Limited was founded in 1997 and is based in Hamilton, Bermuda.

‎

CIQ Business Description:

Information Services Group, Inc., together with its subsidiaries, provides technology insights, market intelligence, and advisory services in the Americas, Europe, and the Asia Pacific. It supports private and public-sector organizations to transform and optimize their operational environments through research, benchmarking, consulting, and managed services with a focus on information technology, business process transformation, program management services, and enterprise resource planning. The company serves private sector clients operating in the financial services, telecommunications, healthcare and pharmaceuticals, manufacturing, transportation and travel, and energy and utilities industries; and public-sector customers comprising state and local governments, airport and transit authorities, and provincial government units. Information Services Group, Inc. was founded in 2006 and is headquartered in Stamford, Connecticut.

‎

CIQ Business Description:

Mastech Digital, Inc. provides information technology (IT) staffing services to large and medium-sized organizations in the United States. It offers a range of IT staffing services in the areas of business intelligence/data warehousing; Web services; service-oriented architecture; enterprise resource planning and customer resource management; mobile applications; and e-business solutions. The company provides IT services for various industry verticals, including automotive, consumer products, education, financial services, government, healthcare, manufacturing, retail, technology, telecommunications, transportation, and utilities. It has strategic relationships with Salesforce.com, Oracle, and Accenture. Mastech Holdings, Inc. was founded in 1986 and is headquartered in Pittsburgh, Pennsylvania.

‎

CIQ Business Description:
‎

Perficient, Inc. provides information technology and management consulting services in the United States. The company designs, builds, and delivers solutions using middleware software products developed by third-party vendors. Its solutions include big data and analytics; technology platform implementation services, including application server selection, architecture planning, installation and configuration, clustering for availability, performance assessment and issue remediation, security services, and technology migrations; and enterprise content management solutions. The company also offers portals and collaboration solutions that include searchable data systems, collaborative systems for process improvement, transaction processing, unified and extended reporting, commerce, content management, and other services; and cloud services comprising architecture, business value and health checks assessments, strategy and road maps, and vendor evaluation and selection services. In addition, it provides enterprise social solutions consisting of ideation and crowdsourcing, mobile apps, employee onboarding, partner and vendor collaboration, user and customer support, expert location/Q&A, and others; and digital marketing services, such as search engine marketing, user experience and design, and conversion rate optimization. Further, the company provides custom applications; business integration; business process management; and customer relationship management solutions. It serves the healthcare, including pharma and life sciences; financial services that include banking and insurance; retail and consumer goods; automotive and transport products; electronics and computer hardware; telecommunications; manufacturing; energy and utilities; business services, and leisure; media and entertainment; and other markets. Perficient Inc. was founded in 1997 and is based in St. Louis, Missouri.

CIQ Business Description:

The Hackett Group, Inc. operates as a strategic advisory and technology consulting firm primarily in the United States and Western Europe. The company offers executive advisory programs, benchmarking, business transformation, and technology consulting services with corresponding offshore support. Its executive advisory programs include advisor inquiry, an inquiry service used by clients for access to fact-based advice on proven approaches and methods; best practice research, a research that provides insights into the proven approaches; peer interaction comprising member-led Webcasts, annual best practice conferences, annual member forums, membership performance surveys, and client-submitted content; best practice accelerators that provide Web based access to best practices, customized software configuration tools, and best practice process flows; and best practice intelligence center, an online searchable repository of best practices, performance metrics, conference presentations, and associated research. The company's benchmarking services conduct studies in the areas of selling, general and administrative, finance, human resources, information technology, procurement, enterprise performance management, shared service centers, and working capital management. These services are used by clients to establish priorities, generate organizational consensus, align compensation to establish performance goals, and develop the required business case for business and technology investments. Its business transformation programs help clients to develop coordinated strategy for achieving performance improvements across the enterprise; and enterprise resource planning solutions professionals help clients choose and deploy the software applications that best meet their needs and objectives. The company was formerly known as Answerthink, Inc. and changed its name to The Hackett Group, Inc. in 2008. The Hackett Group, Inc. was founded in 1991 and is headquartered in Miami, Florida.

‎

CIQ Business Description:

Virtusa Corporation operates as an information technology (IT) services company. It offers business and IT consulting services comprising application inventory and portfolio assessment, business/technology alignment analysis, business process optimization, and quality assurance process consulting; accelerated solution design, enterprise architecture analysis, technology roadmaps, product evaluation and selection, and business process analysis and design; and program governance and change management, program management planning, and complex program management. The company also provides technology implementation services, such as application development, package implementation and integration, software product engineering, application maintenance and support, business process management, CRM and SAP implementations, customer experience and content management, enterprise mobility services, cloud computing, and social media solutions; systems consolidation and rationalization, technology migration and porting, and Web-enablement of legacy applications; data management, business intelligence, reporting and decision support, master data management, data integration, and big data analytics; and software quality assurance and managed testing services. In addition, it offers application outsourcing services, such as the production support, maintenance and enhancement of custom-built and package-based applications, and ongoing software engineering; systems and database administration, and monitoring; outsourcing of quality assurance planning; and preparation and execution of test cases, scripts, and data. Virtusa Corporation provides its services to communications and technology; banking, financial services, and insurance; and media and information industries worldwide. The company was formerly known as eRunway, Inc. and changed its name to Virtusa Corporation in April 2002. Virtusa Corporation was founded in 1996 and is headquartered in Westborough, Massachusetts.

‎

CIQ Business Description:

Wistron Information Technology & Services Corporation operates as an information technology (IT) service provider worldwide. It provides technical consulting services, such as product and application development, testing and validation, enterprise resource planning (ERP), modernization, and professional IT staffing and augmentation services; IT outsourcing services, including development center, operation maintenance, and service desk and call center services; and product globalization services comprising software design, development, and translation services, as well as post-production services consisting of testing and DTP. The company also offers business process outsourcing services, such as electronic data processing, which includes stock updates applied to inventory, banking transactions applied to account and customer master files, and booking and ticketing transactions for an airline's reservation systems; and utility company service billing for the use of gas, electricity, or water, as well as financial support services that enable its customers to offload credit card processing and general application functions. Further, it provides cloud service, mobile, mobile payment, ERP, and SmartRobot solutions. Additionally, the company offers data warehousing/big data implementation and consulting, and Internet advertising data analysis services; application management services; and IT operation and maintenance management services. The company serves banking, insurance, telecom, automobile, healthcare, and retail sectors. Wistron Information Technology & Services Corporation was founded in 1992 and is based in Irvine, California.

Appendix 13: Transfer Pricing Guidelines, Regulations and Legislation

Most developed nations have laws, regulations and legislation governing the pricing of intercompany transactions. Tangible property, intangible property, services and financial transactions (e.g., loans, guarantees) between related or controlled parties must occur at “arm’s length.”

The paragraphs below present an overview of key transfer pricing concepts defined in the OECD Guidelines, the U.S. Regulations, and the Canadian Legislation.

OECD Transfer Pricing Guidelines

Arm’s Length Principle

According to the OECD Guidelines, services provided, goods sold, or intangible assets used by a controlled party must be priced on an “arm’s length” basis, or as if the related enterprises to the transaction were dealing with each other as independent or unrelated parties. A controlled transaction meets the arm's length standard as defined under the U.S. Regulations “…if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm's length result).”

Similarly, the OECD Guidelines state:

The arm’s length principle provides the closest approximation of the workings of the open market in cases where goods and services are transferred between associated enterprises...This reflects the economic realities of the controlled taxpayer's particular facts and circumstances and adopts as a benchmark the normal operation of the market.

As amended, the OECD Guidelines state:

“The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case. For this purpose, the selection process should take account of the respective strengths and weaknesses of the OECD recognized methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular on uncontrolled comparables) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances.”

Determining Comparability

When evaluating the comparability of an uncontrolled transaction to a controlled transaction, all the factors affecting prices or profits must be considered. As defined in the US Regulations, these factors include functions, contractual terms, risks, economic conditions, and property (e.g., embedded intangibles) or services involved in the transaction. The OECD guidelines also cite the above factors and add the additional comparability factor of the business strategies pursued by the parties in relation to the controlled transaction.

Under the OECD Guidelines and the U.S. Regulations, an uncontrolled transaction need not be identical to the controlled transaction to be considered comparable. However, it should be sufficiently similar so that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results.

The OECD Guidelines define methods appropriate for intercompany transactions. The OECD Guidelines do not require taxpayers to perform a best method analysis as required under the U.S. Regulations. Rather, Section 2.2 of the OECD Guidelines discusses the objective of identifying the most appropriate method under the circumstances. Methods defined under the OECD Guidelines are listed below:

 Transactional methods:

o CUP Method

o RPM

o CP Method

 Profits based methods:

o TNMM

o PSM

U.S. Regulations

Section 482 of the U.S. Internal Revenue Code and its corresponding U.S. Treasury Regulations under Section 1.482 provide guidance in evaluating the arm’s length nature of related party transactions. Below, we describe the best method rule and the methods applicable to the Company’s controlled transactions indicated in the U.S. Regulations.

Best Method Rule

The best method rule in the U.S. Regulations requires that the arm’s length result of controlled transactions be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm’s length result. The application of the best method generally establishes an arm’s length range of prices or financial returns with which to test the controlled transactions. In determining the best method, the U.S. Regulations direct taxpayers to consider:

 The degree of comparability between the controlled transaction (or taxpayer) and any uncontrolled comparables; and

 The quality of the data and assumptions used in the analysis.

The U.S. Regulations specify several methods for evaluating whether a controlled transaction meets the arm’s-length standard. Under the “best method rule,” one must use “the method that, under the facts and circumstances, provides the most reliable measure of an arm’s-length result.” There is no priority of methods and, as long as a specified method is the most reliable, it may be used “without establishing the inapplicability of another method.” When selecting a method of analysis, the two most important factors to consider are the degree of comparability between the controlled and uncontrolled transactions, and the quality of the data and assumptions used. In circumstances where two or more methods could be used, and where those methods produce inconsistent results, then it may be relevant to consider whether the results obtained under either of the competing methods are consistent with those that would have been obtained under another method.

U.S. Transfer Pricing Regulations for Services

The methods relevant to the Subject Transactions under the U.S. Regulations are established in Treas. Reg. § 1.482-9, which describes methods to determine taxable income in connection with controlled services transactions. There are seven methods defined in this section.

 SCM

 Transactional methods:

o CUSP Method

o GSM Method

o CSP Method

Transactional methods all typically require reliable data on transactions between the taxpayer and third parties (uncontrolled transactions) that are very similar or identical to the transactions between the taxpayer and the related party (the controlled transactions).

 “Profits based” methods:

o CPM

o PSM

Profits based approaches consider the overall profitability of one or both parties involved in the controlled transaction, rather than looking at specific prices or margins as is the case with a transactional approach.

 Unspecified Methods: Unspecified methods not specifically described in the US Regulations are generally only applied if they provide a more reliable result than a specified method.

The SCM, the transactional methods, and the profits based methods are discussed below.

Services Cost Method

The SCM is an elective method that evaluates the arm’s length nature of a services transaction by reference to the total costs providing the service without a markup. For a service to qualify for the SCM, a taxpayer must reasonably conclude using its business judgment that the service (i) does not contribute to the key competitive advantages, core capabilities, or fundamental risks of success or failure in one or more trades or businesses of the controlled group (“Core Services”); and (ii) is not a specifically excluded service under the Services Regulations.

The following activities are specifically excluded from SCM eligibility:

 Manufacturing;

 Production;

 Extraction, exploration, or processing of natural resources;

 Construction;

 Reselling, distribution, acting as a sales or purchasing agent, or acting under a commission or other similar arrangement;

 Research, development, or experimentation;

 Engineering or scientific;

 Financial transactions, including guarantees; and

 Insurance and reinsurance.

If the service is not excluded, the service must be either (i) a “specified covered service” or (ii) a “low margin covered service” to apply the SCM. The “specified covered service” category includes 101 types of support services defined in Rev. Proc. 2007-13 that are common across industries and that generally do not involve a significant arm’s-length markup. The listed services are typically clerical or administrative in nature, and do not include services that may be considered executive or managerial. If a service is not a “specified covered service,” it may still qualify for the SCM if it is a “low margin covered service.” A “low margin covered service” must have a median comparable markup on total services costs of less than or equal to seven percent.

If applying the SCM, total services costs, i.e., all costs of rendering the controlled transactions, need to be included in the cost base to be allocated. Total services costs include all costs in cash or in kind (including stock-based compensation) that are directly identified with or can be reasonably allocated to the controlled transactions.

As previously mentioned, total services costs do not include interest expense, foreign income taxes, or domestic income taxes. Any reasonable method may be used to allocate and apportion costs related to the controlled transactions to the recipients. Accordingly, those controlled services transactions that meet the eligibility requirements for the SCM may be compensated by reference to total services costs, as discussed above, with no markup. If the eligibility requirements are met and the taxpayer elects to use the SCM, then the SCM will be considered the best method.

For a service to qualify for the SCM, the following requirements must be met:

 The business judgment rule, whereby the taxpayer can conclude that the service provided is not a Core Service;

 The service must not be on the list of excluded services;

 The Company must adhere to the book and records requirements; and

 The service must be either a “specified covered service” as specified by revenue procedure or a “low margin covered service” as discussed below.

Comparable Uncontrolled Services Price Method

The CUSP method evaluates whether the amount charged in a controlled services transaction is arm’s length by reference to the amount charged in a comparable uncontrolled services transaction. Comparable services may be between two third parties (i.e., external comparables) or between one of the related parties and a third party (i.e., internal comparables). The CUSP method is generally the most reliable measure of arm’s length results if transactions are identical or if only minor, readily quantifiable differences exist.

The CUSP method requires a high degree of comparability of services provided and activities performed. Comparability can be enhanced by making reliable adjustments to the comparable price. Adjustments to be considered include those for differences in the:

 Quality of services rendered;

 Duration or quantity of services rendered;

 Intangibles used;

 Collateral tangible transactions;

 Risks borne; and

 Realistically available alternatives.

Gross Services Margin Method

The GSM method evaluates whether the amount charged in a controlled service transaction is at arm’s length by reference to the gross services profit margin realized in comparable uncontrolled transactions that involve similar services. Under this method, the arm’s length price is measured by multiplying the appropriate gross services profit by the price of the relevant uncontrolled transaction. The GSM method is typically used when a controlled taxpayer performs services or functions as an intermediary or agent in connection with an uncontrolled transaction between a member of the controlled group and an uncontrolled taxpayer. This method requires detailed comparisons of functions performed, risks borne, and contractual terms of controlled and uncontrolled transactions. As a result, a higher degree of comparability is more likely to exist between controlled and uncontrolled services provided by the service provider (i.e., internal comparables). In the absence of comparable uncontrolled transactions involving the same service provider, an appropriate comparison may be derived from comparable uncontrolled transactions of other service providers (i.e., external comparables).

The GSM method is unlikely to lead to accurate results if there are significant differences in the:

 Services or functions performed;

 Contractual terms;

 Risks borne;

 Intangibles used; and

 Cost structures or accounting methods.

Adjustments may be appropriate to account for differences between controlled and uncontrolled transactions in the:

 Contractual terms;

 Geographic markets;

 Risks borne; and

 The intangibles used.

Cost of Services Plus Method

The CSP method evaluates whether the amount charged in a controlled services transaction is arm’s length by reference to the gross services profit markup realized in comparable uncontrolled services transactions. The CSP method is ordinarily applied when the renderer provides the same or similar services to both controlled and uncontrolled parties. Under this method, the arm’s length price is determined by adding the appropriate gross profit to the controlled taxpayer’s comparable transactional cost. Comparable transactional cost is defined as the cost of providing the services that are taken into account as the basis for determining the gross services profit markup in comparable uncontrolled services transactions. The CSP method is most often used to assess the markup earned by a controlled party that provides similar services to both controlled and uncontrolled parties.

A service renderer’s gross services profit provides compensation for performing services related to the controlled services transactions, including a profit element for the service renderer’s investment of capital and assumption of risks. Thus, this method requires detailed comparisons of services provided, functions performed, and risks borne, and cost structures between controlled and uncontrolled transactions.

Comparability under the CSP method is less dependent on the close similarity between the services provided than under the CUSP method. However, substantial differences in the services may indicate significant functional differences between the controlled and uncontrolled taxpayers. Ordinarily, therefore, it would be expected that the controlled and uncontrolled transactions involve services of the same general type. Comparability is most likely found among controlled and uncontrolled services provided by the same company (i.e., internal comparables). In the absence of such transactions, an appropriate comparison may be derived from comparable uncontrolled transactions of other service providers (i.e., external comparables). The CSP method is less likely to be reliable if material differences exist between the controlled and uncontrolled transactions with respect to the:

 Services rendered;

 Functions performed;

 Intangibles used;

 Cost structure; and

 Risks borne.

Adjustments may be appropriate to account for differences between controlled and uncontrolled transactions in the:

 Complexity of services;

 Duration or quantity of services;

 Contractual terms;

 Economic circumstances; and

 Risks borne.

The degree of consistency in accounting practices between the controlled transaction and the uncontrolled comparables that materially affect the gross profit markup affects the reliability of the result. If differences in cost accounting practices would materially affect the gross services profit markup, the ability to make reliable adjustments for such differences would affect the reliability of the results obtained under this method. Further, reliability under this method depends on the extent to which the controlled and uncontrolled transactions reflect consistent reporting of comparable transactional costs.

Comparable Profits Method

The CPM evaluates whether the amount charged in a controlled transaction is at arm’s length based on objective measures of profitability (i.e., profit level indicators) derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances. The CPM compares the profitability of a controlled company to that of unrelated comparable companies. The focus is not on the comparability of particular transactions themselves, but on the profit outcome of the transactions and the comparability of the function and risk profiles generating such profits. In most cases, the tested party should not use intangible property or unique assets that distinguish it from unrelated comparable companies. In the absence of usable data on comparable transactions between independent parties, the US Regulations allow the use of functional marketplace comparables to determine compliance with the arm’s length standard. This requires a search for functional comparables using the principles of the CPM to identify an arm’s length range.

The application of the CPM entails identifying companies that engage in similar activities, bear similar types and levels of risk and for which public data are available. The degree of comparability affects the reliability of the CPM analysis. Reliability may be adversely affected by varying cost structures, differences in business experience, or differences in management efficiency. However, the standards of comparability under the CPM are less stringent than those under the transactional methods (e.g., the CUSP method). Thus, less similarity among the services provided is required for reliable results than under the transactional methods.

Adjustments that may be appropriate include those for differences in the:

 Accounting classifications;

 Credit terms;

 Inventory;

 Currency risk; and

 Business circumstances.

When a p p l y i n g th e CPM, t h e f irst s t e p is t o sel e c t t h e t es t ed p ar t y. In ge n e r al, t h e t es t e d p ar t y is a n e nt i t y i n volv e d i n t h e t r a n sa c t ion, or t h e m ost n arr o w ly i d e n t i f i ed b u si n e ss ac t ivi t y in w h i c h o n e of th e e n t i t ies e n gages in t h e c ont r o l led t r a n sa c t i o n . T h e t es t e d p a r t y s h o u l d n ot h old a n y u n i q u e i n t a n g i b les and s h o u l d b e t h e le a st c o mp lex e n t i t y i n th e c o nt r oll e d t r a n sa c t i o n . Finally, the entity whose financial data requires the fewest adjustments and is most reliable is generally tested.

The U.S. Regulations describe the PLIs that may be used in applying the CPM. They include two types of measures: the rate of return on capital employed and financial ratios. Other PLIs not specifically described in the U.S. Regulations may be employed if they provide the most reliable measure of an arm's length result within the meaning of the best method rule. Under this provision, any measure of profit based on objective measures of profitability derived from uncontrolled parties that engage in similar business activities under similar circumstances may be employed. Typically, one of the following PLIs is utilized:

 ROCE: Operating Profit to Operating Assets Ratio

 Berry Ratio: Gross Profit to SG&A Ratio

 OM: Operating Profit to Sales Ratio

 ROTC: Operating Profit to Total Cost Ratio

According to the U.S. Regulations, it may be appropriate to consider controlled and uncontrolled data from one or more years before or after the year under review. The appropriateness of using multiple year data depends upon the transfer pricing method being applied and the specific issue being addressed. Examples of situations that might warrant the use of multiple year data include the extent to which complete and accurate data are available for the taxable year under review, the existence of business cycles or the existence of product or intangible life cycles. When using multiple years of data, the average results of a controlled taxpayer over a multiple year period may be compared with the average results of uncontrolled transactions over the same period if such a comparison is deemed to reduce the effects of short-term variations unrelated to transfer pricing.

Profit Split Method

The PSM is ordinarily used in controlled service transactions involving a combination of routine and non-routine contributions by multiple controlled taxpayers and incorporates the profit split method rules in Treas. Reg. § 1.482-6. The PSM evaluates whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions is arm’s length by reference to the relative value of each controlled taxpayer’s contribution to that combined operating profit or loss. The relative value of each controlled taxpayer’s contribution is determined in a manner that reflects the functions performed, risks assumed, and resources employed by such controlled taxpayer in the relevant business activity.

The Services Regulations include the following two specified profit split methods.

Comparable Profit Split Method (“CPSM”)

Under the CPSM, transfer prices are based on the division of combined operating profit between uncontrolled taxpayers with transactions and activities that are similar to those of the controlled taxpayers in the relevant business activity. Under this method, the uncontrolled parties’ percentage shares of the combined operating profit or loss is used to allocate the combined operating profit or loss of the relevant business activity between the related parties.

Residual Profit Split Method (“RPSM”)

The RPSM involves two steps. First, operating profit is allocated to each party in the controlled transactions to provide a market return for its routine contributions to the relevant business activity. Second, any residual profit is divided among the controlled taxpayers based on the relative value of their contributions of any non-routine contributions to the relevant business activity.

U.S. Transfer Pricing Regulations for Tangible Goods

The six methods specified for controlled sale of tangible goods are established in Treas. Reg. § 1.482-3. The specified methods defined in this section are:

1. CUP Method

2. RPM

3. CP Method

4. CPM

5. PSM

6. Unspecified Methods

Transactional methods applicable under Treas. Reg. § 1.482-3 are discussed below. The CPM, profit split methods, and unspecified methods were previously covered under the U.S. Services Regulations.

Comparable Uncontrolled Price Method

The CUP method evaluates the arm’s-length character of a controlled transaction by comparing the price charged in the controlled transaction to the amount charged in a comparable uncontrolled transaction. The CUP method is generally the most reliable measure of arm’s length results if transactions are identical or if only minor, readily quantifiable differences exist. The CUP method requires a high degree of comparability of products and functions. The U.S. Regulations state that this method may be applied if comparability between transactions can be achieved by a reasonable number of adjustments, which do not materially affect the comparable price.

Adjustments likely to be required include those for differences in:

 Product quality;

 Contractual terms;

 Geographic market;

 Embedded intangibles; and

 Foreign currency risks.

Resale Price Method

The RPM evaluates whether the amount charged in a controlled transaction is arm’s length by reference to the gross margin realized in comparable uncontrolled transactions. The RPM is most often used for distributors that resell products without physically altering them or adding substantial value to them.

The RPM requires detailed comparisons of functions performed, risks borne and contractual terms of controlled and uncontrolled transactions. The RPM is unlikely to lead to accurate results if there are differences in:

 Level of market;

 Functions performed; or

 Products.

A reasonable number of adjustments may be made to compensate for the lack of comparability between controlled and uncontrolled transactions in:

 Inventory turnover;

 Contractual terms;

 Transport costs; and

 Other measurable differences

Cost Plus Method

The CP method compares the gross profit markup realized in a controlled transaction with that earned in comparable uncontrolled transactions. Most often applied to manufacturers selling to related parties, the CP method compares the gross margins resulting from controlled and uncontrolled transactions. The CP method requires detailed comparisons on products produced, functions performed, risks borne, manufacturing complexity, cost structures and intangibles between controlled and uncontrolled transactions. The CP method is less likely to be reliable if material differences exist between the controlled and uncontrolled transactions with respect to:

 Intangibles;

 Cost structure;

 Business experience;

 Management efficiency;

 Functions performed; and

 Products.

To compensate for the lack of comparability between controlled and uncontrolled transactions, a reasonable number of adjustments may be made with respect to:

 Inventory turnover;

 Contractual terms;

 Transport costs; and

 Other measurable differences.

Canadian Legislation

Section 247(2) of the ITA outlines the Canadian transfer pricing requirements. The CRA, also referred to as “Revenue Canada,” is the principle tax administration agency in Canada and is responsible for the enforcement and administration of Canada’s tax laws. The CRA’s Information Circular 87-2R (“IC 87-2R”) and the CRA’s Transfer Pricing Memoranda (TPM-02 through TPM-12) are the main administrative regulations on transfer pricing. The circular was issued in 1987 and reissued in 1999 and is cross-referenced to the OECD Guidelines. Canada is a full member of the OECD and Canadian transfer pricing legislation and administrative guidelines are generally consistent with the OECD Guidelines.

While the ITA does not contain a precise definition of the term “arm’s length,” Canadian Legislation does state that a group of related parties should deal with each other as if they operate as separate entities. The CRA relies on the facts and circumstances of the case to determine a range, or the point in a range, that is the most reliable estimate of an arm's length price or allocation.

Transfer Pricing Methods

The CRA has indicated that it will rely on the OECD Guidelines on the use of transfer pricing methods, utilizing its hierarchical approach with a preference for traditional transaction methods over profit-based methods. The transfer pricing methods provided within the IC 87-2R are:

 Traditional transaction methods,

o CUP Method;

o RPM; and

o CP Method;

 Transactional profit methods;

o PSM; and

o TNMM.

These methods are comparable to the methods described in the U.S. Regulations.

The Canadian Legislation does not impose a hierarchy of transfer pricing methods, nor does it specifically mandate methods to meet the arm's length principle. However, the CRA has expressed the view that there is a natural hierarchy in the methods. The CRA believes that certain methods provide more reliable results than other methods, depending on the degree of comparability between controlled and uncontrolled transactions. It recognizes, however, that the reliability of any method is also affected by the availability of data and the degree of accuracy with which any necessary adjustments can be made to achieve comparability.

Documentation

Section 247(4) of the ITA describes the contemporaneous documentation that a taxpayer must prepare, which must "completely and accurately" describe:

 The property or services to which the transaction relates. This must be done on a transaction-by-transaction basis.

 The terms and conditions of the transaction and their relationship, if any, to the terms and conditions of each other transaction entered between the participants in the transaction.

 The identity of the participants in the transaction and their relationship to each other at the start of the transaction.

 For each transaction, the functions performed, the property used or contributed, and the risks assumed by each participant in the transaction.

 The data and methods considered and the analysis performed to determine the transfer prices or the allocation of profits, losses, or contributions to costs, as the case may be, for the transaction. This implies that even methods that were considered and rejected must be stated for each transaction and the analysis performed must be fully documented.

 The assumptions, strategies and policies, if any, that influenced the calculation of the transfer prices or the allocations of profits, losses or contributions to cost, as the case may be, for the transaction.

The CRA also expects the taxpayer's documentation to include:

 The general organization and a description of the taxpayer's business;

 The reasons for the selection of a particular transfer pricing method, including an explanation of why the selected method is more appropriate than any higher-ranking methods;

 The projection of the expected benefits as they relate to the valuation of an intangible;

 The scope of the search and criteria used to select comparables;

 An analysis of the factors determining comparability, including any differences and the attempts made to make adjustments to take these into account; and

 The assumptions, strategies, and policies as they relate to tangible property, intangible property and services being transferred.